Moody’s cut mortgage Pfandbriefe issued by Hypothekenbank Frankfurt from Aa3 to A1 yesterday (Wednesday) because it understands that OC “cannot be expected” to reach the level consistent with the former rating. Meanwhile, Luxembourg covered bond issuers HFI and EEPK, also part of Commerzbank, are planning to merge.

Under Moody’s methodology, 4.5% is the level of overcollateralisation (OC) consistent with a Aa3 rating of Hypothekenbank Frankfurt’s mortgage Pfandbriefe, but as per 31 March OC on a net present value was 3.6% OC. The rating agency said that the downgrade “follows clarification about the future levels of overcollateralisation held in the programmes” and that “according to Moody’s understanding the OC cannot be expected to reach that threshold [consistent with a Aa3 rating] going forward”.

In addition to downgrading the German issuer’s mortgage Pfandbriefe, Moody’s affirmed its public sector-backed issuance at Aa3, noting that the minimum OC consistent with that rating is 2%, which is that required by the German Pfandbrief Act.

The rating actions conclude a review by Moody’s of the issuer’s covered bond ratings.

Hypothekenbank Frankfurt, the former Eurohypo, is being wound down by its parent, Commerzbank, and “wind-down issuers typically care less about ratings”, said a covered bond analyst.

Commerzbank-owned lettres de gage issuers HFI and EEPK, meanwhile, on 12 May notified the Luxembourg financial supervisory authority of their intention to merge. Natixis analysts noted that Erste Europäische Pfandbrief- und Kommunalkreditbank (EEPK) will cease to exist as a legal entity after the transfer of its asset and liabilities to Hypothekenbank Frankfurt International (HFI).

“Therefore, the cover pool from the two entities will be merged as well,” said the analysts.

As of 30 April EEPK’s cover pool amounted to Eu4.2bn and as of the end of March HFI’s to Eu9.6bn.