Berlin Hyp public sector Pfandbriefe were upgraded from AA- to AA+ yesterday (Thursday), as German issuers benefit from the implementation of changes to Fitch’s methodology that have been made to reflect the impact of the EU bail-in framework.

The upgrade of the public sector (Öffentliche) Pfandbriefe of Berlin Hyp is the result of the issuer’s rating of A+ and an Issuer Default Rating (IDR) uplift of 2. This gives a floor for the rating on a probability of default basis of AA, while the programme has a Discontinuity-Cap (D-Cap) of 4.

Given that Fitch considers the programme dormant and sees no public overcollateralisation (OC) statement, it relies on the legal minimum OC – the higher of 0% on a nominal basis and 2% on a stressed net present value basis – which it said allows for a one notch uplift of AA+ due to recoveries in the 51%-91% range should the covered bonds default. Fitch noted that 0% OC is unlikely to be sufficient to maintain a AA+ rating of the Pfandbriefe should Berlin Hyp be downgraded.

Fitch noted yesterday that alongside the Berlin Hyp upgrade, actions taken so far on German Pfandbriefe in light of the Bank Recovery & Resolution Directive (BRRD) had included breakeven OC levels being reduced for two programmes and an increase in protection against future issuer downgrades for most others.

The rating agency affirmed the AA+ rating of Berlin Hyp mortgage Pfandbriefe and the AAA rating of Landesbank Hessen-Thüringen (Helaba) public sector Pfandbriefe based on only the mandatory OC level imposed by German legislation, which is lower than the previous breakeven OC that had been calculated by Fitch for each rating.

“The revised breakeven OC levels result from the incorporation of an IDR uplift in Fitch’s analysis of the covered bonds which allows the programmes to be rated solely on a recovery basis,” it said.

For other programmes – most of them with AAA ratings – assigned IDR uplifts can in future compensate for potential IDR downgrades caused by a revision of the level of support, which Fitch said is expected to occur later this year or in the first half of 2015.