While Moody’s Investors Service announced that the improvements would prompt it to upgrade its ratings of all Pfandbrief issued by German mortgage banks, its rival Standard & Poor’s saw no reason to take action.
Key among the improvements approved by the German parliament on March 12, is a mandatory 2% overcollateralisation, raising total collateralisation for the Pfandbrief to 102%.
The improvements also include specific guidance regarding proceedings and responsibilities given a theoretical insolvency of the Pfandbrief issuers, which in Germany’s case are nearly all mortgage banks. This change was necessary to placate investors and rating agencies, who felt that the fact that a Pfandbrief had never defaulted was not enough to guarantee its maximum security.
Pfandbriefe continue to dominate the worldwide covered bond market. Yet following the emergence of other European covered bonds that purport to offer more security than the Pfandbrief, the German mortgage banks association VDH lobbied the government to implement the improvements.
As far as Moody’s is concerned, the changes seem to have done the trick. Moody’s has said it will improve its investment grade ratings for public Pfandbriefe – that is bonds covered by public sector loans – another five notches. For mortgage Pfandbriefe, or bonds covered by mortgage loans, the agency said its ratings would improve four notches.
The result of all this is that, at least in Moody’s opinion, all new German Pfandbriefe have taken a big step closer to a triple A rating.
All but one of Germany’s six Pfandbrief-issuing banks would benefit significantly from such a view. The odd bank out is Eurohypo, which is jointly owned by Germany’s three largest commercial banks, including Deutsche Bank, Dresdner Bank and Commerzbank. Moody’s said Eurohypo’s investment grade Pfandbriefe, which had faced a possible downgrade, would now be unchanged as a result of the improvements.
Moody’s view on Eurohypo’s Pfandbriefe alone is the view taken by Standard & Poor’s regarding all Pfandbriefe. Although the agency welcomed the improvements in a statement, it argued that they were too minimal to truly bring German Pfandbriefe closer to triple A.
