Moody’s downgraded from Aa3 to Baa2 the covered bonds of Kommunalkredit Austria yesterday (Thursday), after having withdrawn its ratings of nine that had been transferred to wind-down entity KA Finanz, which said that a new rating from Standard & Poor’s is being prepared.

The rating actions follow the demerger of Kommunalkredit Austria into new entity Kommunalkredit Austria (KA New), which is owned by a private equity group, and KA Finanz.

Moody’s first withdrew its Aa3 rating on the nine covered bonds transferred to KA Finanz, stating that it considers it has insufficient, or otherwise inadequate, information to support the maintenance of the ratings. It said the withdrawal of the ratings follows its withdrawal of its Kommunalkredit Austria counterparty risk (CR) assessment on 6 October, after the bank’s announcement of a corporate reorganisation.

The withdrawal leaves the covered bonds of KA Finanz without a rating, but KA Finanz said in a statement yesterday that a new covered bond rating is being prepared from S&P.

“This is clearly positive and should mitigate any forced selling by investors which cannot hold unrated covered bonds,” said Michael Spies, strategist at Citi, “although it’s not entirely clear when S&P will eventually assign the new rating for these bonds.”

Spies noted that KA Finanz is rated BBB+ at S&P and A- at Fitch. He said that, comparing issuer ratings of S&P to covered bond programme ratings in general, it is expected that the bonds will be rated at least AA or higher.

“This would eventually be a rating improvement for these bonds as they were only rated Aa3 by Moody’s before the ratings were withdrawn,” he said. “Hence, we continue to stick with our recommendation to prefer KA covered bonds to its Austrian peers given the current spread pick-up of around 37bp.”

After the rating withdrawal Moody’s downgraded the covered bonds of KA New by five notches, from Aa3, on review direction uncertain, to Baa2, on review for downgrade.

Moody’s said among the main drivers of the downgrade are the impact on its rating analysis of KA New’s unpublished private monitored CR assessment as well as a fall in the level of committed overcollateralisation (OC) following the demerger.

On 2 October, KA New announced it will terminate a commitment to hold 28% minimum OC. It stated that it intends to hold a 10% OC level going forward, of which, Moody’s noted, none is expected to be in a “committed” form.

The rating agency said that the placement of the covered bonds on review for downgrade reflects that it is awaiting feedback on the level of uncommitted OC that will remain in the programme. It noted that the level of uncommitted OC commensurate with the current Baa2 rating is 14.5%.

“While the programme is expected to benefit from 28% OC until the end of this year, the OC level is expected to fall next year, as per the issuer’s statement,” Moody’s said.

Another driver of the downgrade, Moody’s said, is a material increase in the programme’s foreign exchange rate risk following the demerger. Moody’s noted that KA New took over all of the old entities Swiss franc-denominated issues, meaning 81.3% of its covered bonds are denominated in Swiss francs, compared with only 8.2% of its cover pool assets.

Unlike KA New, KA Finanz did not exercise its right to terminate the 28% minimum OC commitment, announcing on 16 October that it would retain the commitment for its share of the covered bonds, as previously reported. For newly issued covered bank bonds, KA Finanz said it aims to hold a voluntary nominal overcollateralisation of 10%.