Fitch has placed the public sector Pfandbriefe of Commerzbank on Rating Watch Negative following the transfer of lower-rated cover assets and outstanding Pfandbriefe from its subsidiary Hypothekenbank Frankfurt, the former Eurohypo, to the German bank.

Commerzbank on Tuesday announced that it had over the weekend completed the winding-up of Hypothekenbank Frankfurt (HF), and that much of the subsidiary’s assets are being transferred to the cover pools of Commerzbank. The Pfandbriefe of HF, which gave up its banking and Pfandbrief licences, were transferred to its parent.

Commerzbank noted that its public Pfandbriefe are currently rated triple-A by Moody’s and Fitch, whereas the public Pfandbriefe of HF are rated Aa1 by Moody’s. Commerzbank said it is “aspiring to a solid rating of at least AA” for its public Pfandbriefe in the future.

Analysts had suggested that this could presage a downgrade of the public Pfandbriefe, and Fitch announced yesterday (Thursday) afternoon that it has subsequently placed its AAA rating of Commerzbank’s public sector Pfandbriefe on RWN.

The rating agency said this reflects in part its assumptions about the combined cover pool composition, noting that as of 31 March, HF’s public sector cover assets totalled Eu12.3bn, compared with Eu2.2bn in Commerzbank’s programme.

Consequently, Fitch said it expects the combined pool to mirror the greater international diversification of HF’s cover assets, including higher exposure to lower-rated countries, resulting in an increase in credit losses.

HF’s public sector Pfandbrief programme shows significant open foreign exchange positions, according to Fitch. In its modelling, it expects this to lead to higher breakeven overcollateralisation (OC) levels for a given rating than is currently the case for the Commerzbank programme.

Fitch said that as of 31 March, the reported OC for HF’s public sector Pfandbriefe was 6.5% compared with 18.7% for Commerzbank’s AAA-rated programme, while the current breakeven OC to maintain the AAA rating is 16%.

The rating agency said the RWN also reflected Commerzbank’s public statement regarding its intentions to target a AA rating for its public sector programme.

Fitch said the RWN will be resolved upon receipt of information on the composition of the combined public sector cover pool, which it expects to receive in August.

It added that the rating on Commerzbank’s mortgage Pfandbrief programme is unaffected, as, based on the currently available information, changes in cover pool composition and OC levels are not expected to lead to changes in the programme’s AAA rating.