Fitch downgraded Berlin Hyp mortgage and public sector Pfandbriefe and Commerzbank public sector Pfandbriefe yesterday (Monday), before withdrawing the ratings and that of Commerzbank’s mortgage programme, with Berlin Hyp’s Bodo Winkler questioning the rating agency’s thinking.

Fitch yesterday evening downgraded the mortgage and public sector covered bonds of Berlin Hyp from AA+ to AA and the public sector covered bonds of Commerzbank from AA to A+. It affirmed Commerzbank’s mortgage covered bonds at AAA.

The ratings of the four programmes were then withdrawn “for commercial reasons”.

The downgrades are the first to come as a result of changes Fitch made to its covered bond rating criteria on 26 October, which introduced a new approach to determining IDR uplift, among other revisions.

Berlin Hyp’s Pfandbriefe were downgraded because Fitch assigned the programmes a one-notch Issuer Default Rating (IDR) uplift – one notch less than previously – saying the IDR of the bank is based on institutional support from the German savings banks and thus has a lower Viability Rating (VR) of bbb-.

Bodo Winkler, head of credit treasury and investor relations at Berlin Hyp, said the issuer does not fully understand the rationale behind the lowering of the IDR uplift, noting that the programmes of certain other Pfandbrief issuers receive two notches of uplift under Fitch’s new methodology despite also having IDRs driven by support.

“To be honest, we do not really get the reasons for this, even after many conversations with Fitch,” he said. “To keep the AA+ rating would have meant our OC requirement increases, without anything having been changed to the cover pool, and after that we would still have a split rating.

“So we decided that this may be the time to just go with one rating, and we feel very comfortable with that. If you look to all our peers in Germany, most of them get along very well with only one covered bond rating.”

Berlin Hyp’s mortgage and public sector covered bonds are rated Aaa by Moody’s.

Analysts expect the downgrades to have limited market impact, but noted that some investors require the covered bonds they hold to be rated by at least two agencies, meaning some could be forced to sell.

Winkler said he does not expect the removal of the rating to have an impact on the secondary market prices of Berlin Hyp’s outstandings.

“If you look to other mortgage Pfandbriefe that trade in the same region as ours, most of them have only one rating,” he said. “On the other hand, when we had the split rating, with the AA+ from Fitch and the Aaa from Moody’s, some investors would of course take into account the worse rating.

“It is now purely a Aaa product, and I think that offers even more of an argument for why there should be no pricing impact.”

Winkler also noted that Berlin Hyp’s public sector programme is being run down, with only its mortgage programme still active.

The downgrade of Commerzbank’s public sector Pfandbriefe from AA to A+ comes as a result of a transfer of its subsidiary Hypothekenbank Frankfurt’s covered assets and Pfandbriefe into Commerzbank’s own cover pools in May.

Analysts at the time suggested that this could result in a downgrade of Commerzbank’s public sector Pfandbriefe because the public sector cover pool of Hypothekenbank Frankfurt (HF) was considered lower quality. Commerzbank said, upon announcing the merger, that it was “aspiring to a solid rating of at least AA” for the public sector Pfandbriefe.

In June Fitch downgraded Commerzbank public sector Pfandbriefe from AAA to AA, and left them on Rating Watch Negative pending receipt of further cover pool data.

Fitch said yesterday that it had completed an updated full analysis of the cover pool, which resulted in a greater rating loss rate for the combined cover pool of 14.7% in a AA rating scenario, versus 0% for the pre-transfer Commerzbank pool, reflecting increased international exposure that included sub-investment grade assets (9% of the cover pool) and further exposure to assets from peripheral European jurisdictions (5.5%). The portfolio’s weighted average rating fell from AAA/AA+ to A-/BBB+ during the same period.

“Furthermore, net present value differences in scenarios where Fitch tested for timely payment increased significantly, resulting from the high coupons of HF’s outstanding public sector Pfandbriefe, significantly compressing the spread of the programme,” the rating agency said. “Additionally the open FX position on the asset side now exceeds Fitch’s 10% threshold.

“For ratings above A+ the combination of the above mentioned risks resulted in breakeven OC levels being significantly above the current relied-upon OC of 14.2%.”

Commerzbank’s mortgage and public sector covered bonds are rated triple-A by Moody’s and Scope.

While downgrading the three programmes, Fitch affirmed six mortgage Pfandbrief programmes and six public sector Pfandbrief programmes at AAA.

The rating agency also yesterday assigned Commerzbank’s SME structured covered bond programme – which it rates AA – an IDR uplift of two notches, as a result of the implementation of its new criteria.

“Fitch views that there is now greater certainty that Commerzbank’s SME structured covered bonds as secured debt would be exempt from bail-in in a resolution scenario, despite not being regulated and subject to such close monitoring as the Pfandbriefe,” it said. “Furthermore, there are strict eligibility guidelines which together with contractually committed OC mitigate the risk of undercollateralisation.”