Moody’s downgraded public sector covered bonds of Kommunalkredit Austria from Baa2 to Baa3 yesterday (Thursday), a move that had been on the cards since the rating agency in November cut their rating from Aa3 and left them on review for downgrade pending an assessment of a weaker OC plan.

The rating action is the latest in several that have resulted from the splitting of the old Kommunalkredit Austria and its covered bonds into Kommunalkredit Austria (KA New), owned by a private equity group, and KA Finanz, a government wind-down entity.

Moody’s cut the KA New public sector covered bonds from Aa3 to Baa2 in November citing the impact of an unpublished private monitored Counterparty Risk (CR) assessment and a fall in the level of committed overcollateralisation, with KA New having terminated a commitment to hold at least 28% OC and instead said that it intends to hold an OC level of about 10%, none of which the rating agency considers committed and lower than the level commensurate with a Baa2 rating.

After assessing this new OC level Moody’s yesterday cut the covered bonds one notch further to Baa3.

The rating agency also revised the Timely Payment Indicator (TPI) it assigns the programme from “high” to “probable-high” – although this does not constrain the rating.

“We expect that the modelled cover pool losses will going forward exceed the nominal OC that is held in the programme on a voluntary basis,” said Moody’s. “The cover pool losses are higher in this programme than in other Austrian public sector covered bond programmes as 81.3% of the issuer’s covered bonds are denominated in Swiss francs, while only 8.2% of the cover pool’s assets are denominated in Swiss francs.”

Upon the split of the old Kommunalkredit Austria’s covered bond programme, KA New was assigned Swiss franc-denominated and euro private placements, and KA Finanz euro benchmarks. Moody’s in November withdrew its rating of the covered bonds assigned to KA Finanz, which has now terminated the previous 28% OC commitment and is seeking a Standard & Poor’s rating for the issuance.