Moody’s placed the covered bonds of NordLB and subsidiaries Deutsche Hypo and NordLB Luxembourg on review for downgrade yesterday (Wednesday), while aircraft Pfandbriefe of NordLB were downgraded. But the merger of BremerLB into the group could benefit the subsidiary’s Pfandbriefe.

On Tuesday Moody’s carried out a range of rating actions on banks in the NordLB group, including one notch downgrades to the rating of NordLB and subsidiaries Deutsche Hypothekenbank and NordLB Luxembourg, from Baa1 to Baa2. Moody’s subsequently cut the issuers’ Counterparty Risk (CR) assessments from A3 to Baa1.

The rating agency also placed on review for further downgrade all long term ratings and CR assessments of the three issuers.

These downgrades followed the publication of NordLB’s 2016 results on 6 April, in which the group reported a higher than expected Eu2bn net loss, owing to increased loan loss provisions for its shipping exposures, leading to a larger than expected deterioration in the group’s capital position.

On the back of the downgrades to the issuer ratings and CR assessments, Moody’s yesterday (Wednesday) evening placed on review for downgrade: mortgage and public sector Pfandbriefe of NordLB, rated Aaa; mortgage and public sector Pfandbriefe of Deutsche Hypo, rated Aa1; and lettres de gage publiques of NordLB Luxembourg, rated Aa1.

Moody’s said that if the respective issuers’ CR assessments fall below Baa1, their current ratings may not be achievable because Moody’s will no longer give full value to uncommitted overcollateralisation (OC). If the CR assessments were to fall below Baa2, its Timely Payment Indicator (TPI) framework would restrict the covered bonds to below their current ratings.

Moody’s also downgraded the aircraft Pfandbriefe of NordLB, from A1 to A2, as a result of the cut to NordLB’s CR assessment, which is the covered bond anchor. The rating agency said that its expected loss modelling restricts aircraft Pfandbriefe to one notch above the covered bond anchor.

The aircraft Pfandbriefe remain on review for further downgrade.

Moody’s said that during the review of the issuers’ ratings, it will focus on NordLB’s “near-term ability to counterbalance mounting pressures on its weak capitalisation, for instance through executing its announced accelerated de-risking strategy without incurring additional significant losses beyond the rating agency’s current expectations”. It said a lack of “meaningful progress” in de-risking and bolstering NordLB’s capital buffers could result in downgrades of more than one notch.

“Conversely, near term de-risking achievements and/or credible assisting measures by the group’s stakeholders could support the stabilisation of the ratings at their current level,” it added.

NordLB also on 6 April announced plans to merge Bremer Landesbank, another of its German subsidiaries, into NordLB by the end of this year. BremerLB, which has in the past issued mortgage, public sector and ship Pfandbriefe, has been a fully owned subsidiary of NordLB since 1 January.

NordLB has not yet announced how the merger will affect the issuers’ covered bond programmes, but analysts expect the cover pools of BremerLB and NordLB to be combined.

According to figures from BremerLB, as of the end of 2016 it had Eu3.13bn public sector Pfandbriefe outstanding, Eu797m mortgage Pfandbriefe, and Eu102m ship Pfandbriefe.

The Pfandbriefe of Bremer Landesbank are not rated, and analysts said holders of its bonds should therefore benefit from any merger of the pools.