UK assets already backing German Pfandbriefe will remain eligible for cover pools after Brexit under a proposed amendment to the Pfandbrief Act, which Moody’s today (Monday) said is a credit positive, noting that UK assets constitute as much as 13.8% of some issuers’ collateral.

The German ministry of finance last Tuesday (9 October) proposed an amendment to Germany’s covered bond legislation that would ensure that UK assets included in the cover pools of Pfandbrief before Brexit remain eligible for cover pools after Brexit, the rating agency noted.

“The proposed change of the Pfandbrief Act is credit positive for covered bonds because it would preserve the current levels of overcollateralisation (OC) available for covered bondholders,” said Moody’s. “Because the UK is currently within the European Economic Area (EEA), its assets are eligible for Pfandbriefe cover pools, but post-Brexit – without the proposed amendment to the Pfandbrief Act – UK assets’ eligibility would have fallen outside eligibility criteria.”

Aside from the EEA, assets from the US, Canada, Switzerland, Australia, Japan, New Zealand and Singapore are eligible for Pfandbrief cover pools. Ineligible assets in cover pools are not considered for the purposes of statutory coverage test calculations.

Although UK assets comprise only 2.3% of the total assets in German cover pools, for four programmes they constitute more than 10%, the highest being the mortgage Pfandbrief cover pool of Deutsche Pfandbriefbank (pbb), at 13.8%. The average for mortgage Pfandbriefe is more than double that of public sector Pfandbriefe, and six of the seven programmes with the highest concentration of UK assets are mortgage Pfandbriefe.

UK assets in German Pfandbrief cover pools: Programmes with highest concentration, and averages

Data as of 30 June 2018; Source: Association of German Pfandbrief Banks (vdp) and issuers

The Pfandbrief Act generally limits assets from outside the EEA to 10% of eligible cover pool assets to address concerns that other creditors might successfully claim non-EEA assets after an issuer’s insolvency, but Moody’s noted that issuers have developed trust structures that ring-fence non-EEA assets for the benefit of covered bondholders in certain countries, meaning they do not count towards the 10% limit.

“We expect issuers to establish trust structures if UK assets bring the share of non-EEA assets above 10% so they remain able to issue Pfandbriefe against these assets,” said the rating agency.