Deutsche Pfandbriefbank (pbb) is restructuring its cover pools in connection with a move to separate itself from FMS Wertmanagement and pave the way for reprivatisation in 2015, with analysts seeing the credit quality of the issuer’s cover pools improving as a result of the changes.

The cover pool adjustment was announced in connection with pbb’s second quarter results, announced on Tuesday, and is based on termination of what the issuer has called a “limping” sub-participation synthetic transfer of assets to FMS Wertmanagement, the bad bank for Hypo Real Estate.

This took place in October 2010 and involved a transfer of Eu12bn of mortgage loans, although the assets remained on pbb’s balance sheet. According to UniCredit analysts, cashflows resulting from the assets were passed on to FMS Wertmanagement.

Some Eu8bn of the transferred mortgage loans were assets in the mortgage Pfandbrief cover pool and remained there. As at the end of June, the volume of these assets had declined to around Eu4.1bn due to maturities, according to pbb.

It said that exclusion of the synthetically transferred loans from the mortgage cover pool is part of the next step in the “disentanglement” of pbb and FMS Wertmanagement, which entails exiting a servicing agreement and terminating the sub-participation.

In other words, pbb is removing Eu4.1bn of assets from the mortgage cover pool, with FMS Wertmanagement taking “full command” of the mortgage loans. In exchange, the wind-down institution grants an acknowledgement of debt to pbb, which will be included in the public sector Pfandbrief cover pool.

This, said UniCredit analysts, compensates for a transfer of Eu2.8bn worth of Austrian, French and German public sector bonds from the public sector cover pool to the mortgage cover pool.

“Thus, transferred assets will be replaced by German exposure (FMS Wertmanagement, rated Aaa n/AAA s/AAA s) and the cover pool size will decrease slightly by Eu200m to around Eu28.8bn,” said the analysts. “Compared to the volume of outstanding public sector Pfandbriefe of Eu24.5bn, this results in overcollateralisation of around 17%,” they said.

Pbb noted several ways in which the mortgage cover pool will change, such as mortgages in different countries being replaced by highly rated public sector bonds (57% rated AAA, 43% AA+), the share of ECB repo eligible collateral increasing, currency mismatches falling due to the exclusion of loans in a range of foreign currencies, and that the matching of interest rate payment types improving due to a slight increase in fixed rate assets.

The volume of cover assets will decline by around 6% to around Eu20bn, according to the issuer, resulting in overcollateralisation of 38%. Substitute cover assets increase to Eu6.8bn, it said.

UniCredit analysts welcomed the cover pool changes.

“We view the new composition of both the public sector cover pool and the mortgage cover pool as credit positive, as the share of German exposure (public sector pool) will increase and asset-liability matching in the mortgage cover pool improve,” they said. “Given the cover pool optimisation and the sound 2Q13 results, we view pbb’s Pfandbriefe as attractive from a relative value perspective.”

LBBW analysts said that the changes will be registered for the first time in Pfandbrief Act §28 transparency reports as of 30 September, and said that the quality of both cover pools will on balance improve.