S&P has placed on CreditWatch negative public sector covered bonds issued by Luxembourg EEPK because it considers that the available credit enhancement is not in line with their A+ rating, but noted that the issuer plans to adjust the composition of the cover pool.

The lettres de gage publiques were placed on CreditWatch with negative implications on Friday, with Standard & Poor’s noting that the available credit enhancement of 7.16% is lower than the target level for the prevailing A+ rating.

It said that it can only maintain the A+ rating on the covered bonds issued by Erste Europäische Pfandbrief- und Kommunalkreditbank (EEPK) if the available credit enhancement is equal to or higher than the target credit enhancement of 8.23%.

The rating agency said that it understands that the issuer plans to adjust the composition of the cover pool by replacing some cover pool assets with higher rated assets, and that this could lead it to lower the target credit enhancement for the A+ rating on the lettres de gage programme.

It said that EEPK has 90 days to take action to address the issue and that, all else being equal, it could lower the covered bonds’ rating by one notch if action is not taken or if the replacement assets do not “adequately improve the credit enhancement to levels commensurate with the current rating”.