Standard & Poor’s has upgraded public sector Pfandbriefe issued by Dexia Kommunalbank (DKD) from A to A+ following an increase in the available overcollateralisation for the programme, with S&P’s treatment of zero coupon bonds a factor.

The rating agency said that it reviewed the covered bond programme on the basis of data as of 30 June and that the upgrade reflects increased available overcollateralisation that it takes into consideration in its cashflow analysis.

A factor contributing to the increase was S&P’s treatment of zero coupon bonds. The rating agency considers zero coupon bonds at their final notional value when analysing OC levels, which is different to how DKD reports its OC.

S&P noted in its release on the upgrade that the OC it considers in its cashflow analysis increases as zero coupon bonds approach maturity.

“Since we understand that DKD intends to maintain the current level of reported OC and not issue any zero bonds, we expect the increase in available OC to be sustainable,” the rating agency said. “DKD’s public sector covered bonds can therefore achieve an additional notch of uplift above the issuer credit rating on DKD’s parent, Franco-Belgian bank Dexia Crédit Local, as per our criteria.”

The outlook on the Pfandbriefe is stable, said S&P, reflecting the outlook on Dexia Crédit Local, of which it considers DKD to be a core subsidiary.