Moody’s yesterday (Wednesday) upgraded a Commerzbank SME loan-backed covered bond from Aa2 to Aa1 after the appointment of a third party account bank, which was in turn triggered by a Fitch downgrade of the German bank in May.

Fitch downgraded Commerzbank from A+ to BBB in May in conjunction with a review of sovereign support for banks. Under the covered bonds’ documentation, the downgrade to below A- triggered a requirement for the appointment of a third party account bank and an increase in overcollateralisation, and Commerzbank duly appointed The Bank of New York Mellon (BNY Mellon) account bank.

Commerzbank is rated Baa1 by Moody’s and has a Counterparty Risk assessment of A3, and the appointment of BNY Mellon, with a Aa1 deposit rating, has lowered counterparty risk in the transaction, Moody’s said yesterday.

“The covered bonds’ exposure to counterparty risk through the account bank is higher than in most other covered bond transactions that Moody’s rates because of the assets’ short weighted-average life, which is 1.6 years,” added the rating agency. “Therefore collections cumulated from the cover assets in the account bank could be significant relative to the overall cover pool balance.”

The Timely Payment Indicator (TPI) of the programme was also improved, from “probable” to “probable-high”, and it now has a TPI leeway of one notch, the rating agency said.

According to Moody’s, “committed” overcollateralisation (OC) is 11.1% and as of 30 March OC was 21.0%, with the minimum OC level consistent with a Aa1 rating being 9.5%, of which all must be provided in a “committed” form.