DBRS published its Legal & Structuring Framework (LSF) assessment of Germany’s Pfandbrief Act yesterday (Monday) as it aims to expand its covered bond ratings coverage beyond peripheral and southern Europe into central and northern Europe.

The rating agency’s review of issuance under Germany’s Pfandbrief Act (Pfandbriefgesetz) is its first comprehensive analysis of the country’s legislative issuance. DBRS’s LSF assessments are one of the four pillars of its European covered bond rating methodology.

“It is one of the countries that we have classified as one where covered bonds are a particularly strong financing tool,” said Vito Natale, head of covered bonds and surveillance at DBRS, “and so we expect that the ratings that can be achieved can be the highest.”

DBRS described German legislation as “highly prescriptive”, noting that it clearly spells out bankruptcy remoteness of the cover pool from ordinary creditors of the issuer and highlighting several other beneficial features that provide for strong protection for holders of Pfandbriefe.

It nevertheless noted residual risks that the cover pool may not ensure timely payment immediately after an insolvency of the issuer based on its understanding of two factors: a residual risk that overcollateralisation (OC) that is deemed excessive is withdrawn from the cover pool – although it considers this to be a “remote event”; and that no assurance can be given that a hard-coded 180 day asset and liability matching rule will, under all circumstances, succeed in averting a default of covered bonds in the immediate aftermath of a non-payment of the reference entity (RE).

DBRS’s covered bond ratings have thus far taken in the peripheral countries of southern Europe and Ireland, but according to Natale, the rating agency hopes to expand its coverage northwards. Its LSF assessment for Germany follows ones for Austria, Belgium and France, and he said that assessments for Denmark and Sweden are in the pipeline, to be followed by the UK.

“The idea is that we will cover hopefully all the European jurisdictions, but in any case the most important European jurisdictions,” said Natale.