A move by members of the Association of German Pfandbrief Banks (vdp) to remove assets exposed to Heta from public sector cover pools and replace them with substitute assets is credit positive and demonstrates the importance placed on the Pfandbrief’s reputation, Moody’s said today (Monday).

The rating agency cited a report on Wednesday by Börsen-Zeitung that vdp members have substituted assets exposed to Heta Asset Resolution, the wind-down entity of failed Austrian issuer Hypo Alpe-Adria-Bank, with good quality performing assets, thereby, according to Moody’s, maintaining overcollateralisation levels and strengthening their quality. A vdp spokesperson confirmed the move to The CBR today.

Moody’s said that while the issuers are not required to remove non-performing cover assets under the German Pfandbrief Act and while the affected covered bond programmes’ overcollateralisation levels in all cases exceeded Heta exposures – implying that investors were already protected from potential losses – the move has further strengthened investors’ position.

The rating agency noted that as of 30 September, state-guaranteed claims against Heta – on which the Austrian government declared a moratorium on 1 March – included in German public sector Pfandbriefe cover pools it rates totalled Eu658m.

Moody’s said that the credit positive move demonstrates the importance the German banking industry places on the reputation of the Pfandbrief.

“The removal of the Heta exposures is a fresh example of the type of issuer discretion we observed during the financial crisis,” it said, “when issuers voluntarily substituted underperforming and non-performing assets with well-performing assets, thereby maintaining the viability of this important funding source.

“It differentiates covered bonds from other structured finance instruments that transfer asset risk to new owners and it is a positive factor that we consider in our analysis of covered bonds.”

The two programmes that benefit most are the public sector covered bond programmes of HSH Nordbank and Deutsche Hypothekenbank, because they had the greatest percentage of Heta assets in their cover pools, the rating agency added.