The merger of Deutsche Hypothekenbank’s cover pools into NordLB’s will be credit positive, Moody’s said today (Tuesday), due to the greater diversity and granularity that will result, with the rating agency highlighting the differences between the make-up of the legacy pools.

Deutsche Hypo, which has hitherto been a subsidiary of NordLB, will be merged into its parent on Thursday (1 July), and the cover pools backing their mortgage and public sector Pfandbriefe will be combined.

“NordLB’s and Deutsche Hypo’s cover pools differ significantly, so the combined pools will be more diverse after the mergers, which will disperse risks,” said Moody’s. “The mergers will also increase the size of the pools, which will reduce the concentration of exposure to individual obligors and therefore lower cover pool credit risks.”

While Deutsche Hypo’s mortgage cover pool includes only commercial real estate (CRE), which is dominated by office and retail properties split almost evenly between Germany and elsewhere, NordLB’s includes a mix of residential (22.5%) and commercial (77.5%), with German multi-family properties the largest property.

The rating agency noted that Deutsche Hypo’s mortgage cover pool is much larger than NordLB’s, €8.7bn vs. €4.9bn, while the respective amounts of mortgage Pfandbriefe outstanding are €8.3bn and €2.0bn. NordLB’s overcollateralisation level is therefore much higher, at 149.0%, than Deutsche Hypo’s 11.2%.

“The blended OC of the combined pool will be about 32% and will provide stronger credit support to the covered bonds and more leeway regarding additional covered bond issuance compared with Deutsche Hypo’s standalone OC,” said Moody’s. “The combined cover pool’s OC level will be much lower than NordLB’s current excessive OC level, but will not be a threat to the credit quality of the covered bonds because the actual OC level will still well exceed the OC level that is currently consistent with the rating of the covered bonds.”

Both Deutsche Hypo and NordLB mortgage Pfandbriefe have been rated Aa1.

Moody’s noted that a key reason for its weaker collateral score for NordLB’s mortgage pool (12.4%) than Deutsche Hypo’s (10.0%) is a shortfall in data it receives from NordLB in relation to borrowers’ total leverage, meaning it has to adjust reported data.

“If this reporting gap carries over to the merged pool, we might apply this adjustment to all loans in the combined pool, which for the purposes of our collateral score, would offset the positive effects of the pool’s improved diversity,” the rating agency said.

On the public sector side, NordLB’s pool will make up 81% of the combined pool, given its €13.5bn of assets vs. Deutsche Hypo’s €3.1bn – the respective public sector Pfandbrief volumes are €9.7bn and €2.7bn, and both have been rated Aa1. NordLB’s pool is 92.2% claims against the German public sector, while Deutsche Hypo’s is 41.3% international.