Moody’s upgraded Kommunalkredit Austria public sector covered bonds from Baa3 to Baa2 on Friday on the back of a reduction in foreign currency risk as the financial institution shifts to euro issuance, and a reduction in credit risk related to a seven-notch upgrade of the State of Carinthia.

The rating agency cited action taken by Kommunalkredit Austria to reduce currency mismatches in its cover pool resulting from the majority of its covered bonds being denominated in Swiss francs while almost all collateral is denominated in euros – something Moody’s noted is unlike most other Austrian programmes (and which is hedged with swaps that are not part of the cover pool).

“This currency mismatch has been reduced over the course of the last year as Swiss franc-denominated covered bonds have been repaid at their maturity date,” it said. “Now 73.5% of the issuer’s covered bonds are denominated in Swiss francs and we understand from the issuer that he will focus future funding activities on euro bonds to further reduce the currency mismatch in the programme.”

The Swiss franc share of the cover pool is down from 81.5% at the end of 2015.

Credit risk in the programme has been reduced, said Moody’s, thanks to a “rebound” in the credit strength of the State of Carinthia – which according to a cover pool investor report constituted 9.2% (Eu122m) of the cover pool as of 31 January. The Austrian region was upgraded from B1 to A3, “reflecting a massive reduction in Carinthia’s contingent liabilities as the KAF fund backed by the Austrian government (Aa1 stable) acquired HETA instruments for which Carinthia is statutorily liable as deficiency guarantor”.

The covered bonds had been cut to Baa3 in February 2016 following the split of Kommunalkredit Austria and its programme in two.