Fitch placed Deutsche Postbank public sector Pfandbriefe on Rating Watch Negative yesterday (Monday), after the rating agency switched to treating the programme as dormant, triggering changes in the level of OC taken into account and a D-Cap component.

Fitch rates the öffentliche Pfandbriefe AAA, and said that it could confirm the rating at this level if the issuer publicly states its intention to maintain overcollateralisation (OC) at least matching AAA breakeven OC of 17%.

“The agency expects Postbank to clarify shortly its intention regarding OC maintenance for its public sector Pfandbriefe, at which point the Rating Watch will be resolved,” it said.

In the absence of a public OC statement, the level of OC that Fitch would take into account would allow the public sector Pfandbriefe to be rated one or two notches above the bank’s long term issuer default rating (A+), at AA or AA-, based on recoveries given default.

The rating agency considers a covered bond programme to be dormant if there has been no issuance off it in more than 24 months. In these cases, in the absence of a public OC commitment, Fitch only gives credit in its analysis for the minimum mandatory OC, which for German Pfandbriefe is the legal minimum OC of 2% on a stressed net present value basis or 0% on a nominal basis.

The rating agency also changed the risk assessment for the cover pool specific alternative management Discontinuity Cap (D-Cap) component, from low to moderate, because it considers that the potential for cover pool deterioration in the run-up to an issuer insolvency is greater than that of non-dormant programmes. As a result, this component is the weak link driving the programme’s D-Cap.