German issuers have strengthened the quality of cover pools backing Pfandbrief programmes through a reduction in exposure to foreign assets, according to Moody’s, with exposure to peripherals in public sector deals falling 45% over five years and more recently residential exposure in mortgage-backed covered bonds rising.

The rating agency said in a report published on Wednesday that foreign exposures have decreased by 3.1% over the past five years in public sector pools and by 2.4% over the past two years in mortgage pools.

“The decrease in exposure to foreign assets is credit positive because it has been achieved through a reduction in riskier assets” said Martin Rast, vice president and senior credit officer in Moody’s structured finance group. “In addition, the reduction in non-domestic assets has diminished exposure to refinancing risk.”

Although the increased domestic focus of German cover pools reduces risk diversification, Rast noted that the positive effects of the reduction in international exposure outweigh the negative.

The rating agency said that the heightened focus on domestic assets leads to a better credit quality of the pool for both public sector and mortgage-backed Pfandbriefe because public sector pools are less exposed to the riskier credits in the euro area periphery, and in mortgage pools international assets are usually commercial and less granular, and carry higher credit risks than domestic assets.

Exposures to euro periphery countries fell from 8.9% to 4.9% from 2009 to Q3 2013, according to Moody’s. The share of residential mortgage loans in mortgage-backed Pfandbriefe was, at 50%, at its highest level since 2010, according to the rating agency’s findings.

German Pfandbrief issuers have been reducing their exposure to foreign assets in line with an overall deleveraging as a result of the financial crisis in 2008, noted the rating agency.

“In order to deleverage, issuers have withdrawn from certain lines of business, often including international businesses, “ it said.

Moody’s expects Pfandbrief issuers will continue their focus on domestic assets as they seek to deleverage.