Moody’s withdrew its rating of Depfa ACS Bank public sector covered bonds yesterday (Tuesday), meaning that none of Depfa’s remaining covered bonds now carry ratings, while LBBW analysts said that recent changes to the ACS cover pool have led to a decline in asset quality.

German agency FMS Wertmanagement has been winding down former HRE Group member Depfa Bank and its covered bond issuing subsidiaries, Depfa ACS Bank in Ireland and Depfa PBI in Luxembourg, including buying back and cancelling issuance.

In July 2016 Depfa flagged the possible withdrawal of further ratings, after having already cancelled some, and on 23 December Standard & Poor’s withdrew its ratings of Depfa PBI following the issuer’s request to withdraw from the rating process. On Tuesday of last week (17 January) Depfa said that it had requested the termination of its rating contract with Moody’s, which noted that the status of its rating had changed from solicited to unsolicited.

Moody’s then yesterday announced the withdrawal of the Aa2 rating previously assigned to Depfa ACS Bank’s covered bonds, citing “insufficient or otherwise inadequate information” to support their maintenance. Specifically, it said that it could not analyse the impact of the repurchase and cancellation of Eu4bn of covered bonds and sizeable redemptions in the final quarter of last year.

LBBW analysts said on Friday that based on data as of the end of December, they believe the asset quality of the collateral to have declined as a result of higher cluster risks from the periphery (whose share rose from 14.4% to 25.6%, while Germany’s fell from 22% to 4.6%), which is reflected in a downward shift in rating classes within the cover pool. They also noted that overcollateralisation is slightly down, at 7.8%, on the level at the end of the third quarter, 8.4%.

Karsten Rühlmann, LBBW senior investment analyst, said that the rating cancellations could result in certain investor groups no longer being permitted to invest in the covered bonds, and that liquidity is expected to decline further.