Soffin and the HRE group will wind down Depfa Bank plc rather than sell it, it was announced yesterday (Tuesday), thereby limiting downside rating risk for Depfa, which resulted in a sharp rally in the issuer’s covered bonds today.

According to a syndicate official two year Depfa ACS spreads tightened 65bp this morning.

Depfa had been put up for sale as part of a state aid agreement with the European Commission when the HRE group was given government support at the height of the crisis. However, with private equity houses among the leading potential acquirers there had been fears that such a sale could result in Depfa covered bonds being downgraded.

The Federal Agency for Financial Market Stabilisation (FMSA) said yesterday that the sale has been called off and that Soffin (the Financial Market Stabilisation Fund) and the HRE group will prepare Depfa for wind down via FMS Wertmanagement, which is the existing wind-down entity for ex-HRE assets. This means that Depfa will effectively remain in the hands of the German government, with its rating and hence covered bond ratings supported.

“While rating consequences for Depfa Bank plc covered bonds (Depfa ACS and PBINTL LdG) will depend on the details of the structure during the wind-down, the abandonment of the sale is a game changer regarding rating downside risk,” said a covered bond analyst.