Moody’s today (Wednesday) placed on review for downgrade the Aaa rating of mortgage and public sector Pfandbriefe issued by Eurohypo after a corresponding rating action on the issuer rating earlier today.

The rating agency said that if Eurohypo’s issuer rating (A3) is lowered to below Baa1 the ratings assigned to the covered bonds will be capped at a level lower than Aaa because of the interaction between a Timely Payment Indicator (TPI) of “high” for the mortgage and public sector Pfandbriefe and the issuer rating. The TPI leeway is one notch for the mortgage and public sector backed covered bonds.

The rating agency noted that if the issuer is downgraded below A3 it will give limited value to collateral that is not considered “committed.” Moody’s considers overcollateralisation to be committed if the issuer’s discretion to remove it is sufficiently restricted.

Moody’s earlier today placed the rating of Eurohypo and some other Commerzbank group entities on review for downgrade because it considers that Eurohypo’s franchise is eroding and its resilience to any further deterioration of the euro-zone debt crisis is weakening, in turn adversely affecting the credit profile of the whole Commerzbank group.

Moody’s rates Eurohypo A3 and placed the rating on review for downgrade in addition to lowering the standalone bank financial strength rating (BFSR) of Eurohypo from D- to E+.

The rating agency considers that Eurohypo’s franchise is fragile due to a rising probability of further large credit losses in the context of the bank’s remaining exposure to Greece, its reliance on Commerzbank for its funding needs, and the prospect of regulatory changes that might materially affect the functioning of Eurohypo’s business model.

“Given its inadequate economic capital and lack of market access for unsecured long term funds, Moody’s believes that Eurohypo – as a standalone bank – could not weather a further weakening of the yet-unresolved euro area debt crisis,” said Moody’s.