Scope has assigned Dexia Kommunalbank Deutschland (DKD) public sector Pfandbriefe a AA- rating in the first solicited covered bond rating from the agency, with the German bank getting the new rating after publicly disagreeing with a downgrade from Standard & Poor’s a year ago.

Scope assigned its first covered bond ratings in September – triple-As to 17 programmes of nine major European banking groups – but these were on an unsolicited basis, based on public information, and did not incorporate cover pool analyses.

“We are delighted to have the first solicited covered bond rating,” said Karlo Fuchs, head of covered bond ratings at Scope, “and are already actively working on additional ones.”

The new DKD Pfandbrief rating is two notches higher than the programme’s only other rating, A from Standard & Poor’s. When S&P cut the rating from A+ in May 2015 following an update to its methodology DKD said it disagreed with the rating agency’s reasoning.

Scope said the AA- rating, on stable outlook, of the Öffentliche Pfandbriefe (OePfe) reflects its credit assessment of the issuer (a private rating), further enhanced by credit benefit from the cover pool, comprising predominantly German public sector assets, which it said can support a credit differentiation of six notches above the issuer’s rating.

“The rating also incorporates the fundamental credit positive impact of the German legal covered bond framework and the benefits of the resolution regime,” it added. “However, Scope’s assessment also reflects that Dexia Group is in an orderly wind-down after having received state support and being bailed out.

“Therefore, Scope expects it is less likely for DKD, than for other OePf issuers, that regulators will use all available resolution tools to ensure its further maintenance with a view to preserve critical functions. In Scope’s view this translates into a fundamental credit differentiation of five notches to the issuer rating.”

Scope said its credit assessment of the issuer reflects the limits the public sector business faces in Dexia Group’s orderly resolution and unwinding, but is helped by a letter of support from DKD parent Dexia Crédit Local, and the quality of the assets remaining on its balance sheet.

Among scenarios cited by Scope that could lead to the covered bond rating being upgraded is a permanently higher level of overcollateralisation (OC). However, the rating agency said that “given the past management of OC, and Scope’s credit view on the issuer, an OC-driven upgrade would only be considered if the issuer communicates robustly to the capital markets that additional OC levels will be kept permanently”.

DKD could have maintained its A+ S&P rating in May 2015 had it increased OC by several percentage points.

“When designing the composition of its cover pool for Öffentliche Pfandbriefe, DKD traditionally has pursued a policy of a steady hand and of continuity,” it said. “For many years, the nominal over-collateralisation has been higher than the target value of 8.15% of the outstanding Pfandbriefe with only slight changes in the debtor structure.”