Commerzbank has completed the winding-up of Hypothekenbank Frankfurt, the former Eurohypo, with “large proportions” of the subsidiary’s assets to be transferred to the cover pools of Commerzbank, which flagged a lower minimum targeted rating for its public sector Pfandbriefe than their current triple-A.

After having at one time been the biggest issuer in the covered bond market as Eurohypo, Hypothekenbank Frankfurt (HF) was in wind-down to meet requirements imposed on parent Commerzbank by the European Commission as part of a state-aid agreement. In 2012 the Commission changed the conditions of the agreement, allowing a scaled-down part of the former Eurohypo’s commercial real estate businesses to be continued in Germany and certain other countries. Commerzbank then announced its intentions to gradually transfer this business to itself over the coming years.

Commerzbank announced yesterday (Tuesday) that the portfolios of HF were transferred to Commerzbank over the weekend. It said HF has now been transformed into service company LSF Loan Solutions Frankfurt GmbH, with its banking licence and Pfandbrief licence returned.

In the course of the winding-up process all outstanding Pfandbriefe of HF were transferred to the parent bank.

Commerzbank said large portions of the private residential mortgage loans of HF are being transferred to its cover pool. Commerzbank noted that its own mortgage Pfandbriefe and those of HF are rated triple-A, and said it aims to retain this rating.

However, it added that the outstanding public Pfandbriefe of Commerzbank 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.

“With a view to the necessary surplus cover, the statutory requirements plus a sufficiently large buffer are being created for the management of the cover pool,” the issuer added. “Mortgage Pfandbriefe and public Pfandbriefe will also be a permanent element in the long term funding of Commerzbank in the future.”

HF’s public sector cover pool stood at Eu12.276bn, on a nominal basis, as at 31 March, while Commerzbank’s was Eu2.222bn.

In August, Fitch said it would review its rating of Commerzbank’s mortgage Pfandbriefe should HF’s programme be merged with Commerzbank’s programme.

“A larger credit loss, and subsequently an increase of breakeven OC (overcollateralisation), would be expected if the commercial assets remain in the pool given that Fitch generally views commercial real estate loans as higher risk than standard residential mortgage loans currently included in the issuer’s mortgage Pfandbriefe cover pool,” said Fitch.

Commerzbank announced yesterday that the commercial real estate loans of Hypothekenbank Frankfurt will, “on principle”, not be assigned to Commerzbank’s cover pool. The servicing and ongoing run-down of the commercial real estate loans portfolio will be conducted by LSF, operating mostly independently, it added.

As at 31 March, HF held Eu6.729bn in residential mortgage cover pool assets and Eu3.935bn of commercial mortgage assets. This compares with Eu7.587bn and Eu7.59bn, respectively, as at 31 March 2015. Commerzbank’s mortgage cover pool comprised Eu10.005bn of assets as at 31 March 2016.

An analyst played down the market impact of the transfer.

“I doubt there will be anyone trading these bonds in the market because of this headline,” he said. “Everyone has been treating these bonds as Commerzbank bonds before, as everyone expected them to be transferred eventually.”