Moody’s on Friday downgraded the covered bonds of NordLB and subsidiary NordLB Luxembourg to Aa1 and Aa3, respectively, after downgrading the issuers over its concern that the success of the German parent’s de-risking efforts depend on future developments in shipping markets.

Moody’s downgraded by one notch the ratings of NordLB and subsidiaries NordLB Luxembourg, Deutsche Hypo and BremerLB on 30 June, cutting their deposit ratings from Baa1 to Baa2 and senior unsecured ratings from Baa2 to Baa3. Their Counterparty Risk (CR) assessments were also downgraded, from Baa1 to Baa2.

The issuers’ ratings had been under review since April, when they were initially downgraded by one notch following the publication of NordLB’s 2016 results, in which the group reported a higher than expected loss, owing to increased loan loss provisions for its shipping exposures.

Moody’s said the downgrades in June reflect its view that the success of NordLB’s efforts to de-risk and stabilise its capitalisation depends to a significant degree on the future development of shipping markets.

“While NordLB made adequate progress in its de-risking program, supported by a less adverse shipping market environment than in 2016, we believe that the bank will only gradually rebuild a sufficient degree of resilience against adverse ship market value and freight rates scenarios, leaving it significantly exposed to solvency risks within the next 12 to 18 months,” said Bernhard Held, vice president, Moody’s.

As a result of the downgrade to the issuer’s CR assessment, on Friday afternoon Moody’s downgraded the mortgage and public sector covered bonds of NordLB from Aaa to Aa1 and the public sector covered bonds of NordLB Luxembourg from Aa1 to Aa3.

In both cases, the downgrade of the respective issuer’s CR assessment had increased the expected loss on the covered bonds, and with neither issuer providing additional committed overcollateralisation beyond the 2% required by their respective national covered bond legislations, the new expected loss analysis is consistent with the new lower covered bond ratings.