Standard & Poor’s Ratings Services said it affirmed its ‘AAA’ ratings on the public sector covered bonds issued by Germany-based Hypo Real Estate Bank International AG (HI), Hypo Real Estate Bank AG (Hypo Germany; HG), Depfa Deutsche Pfandbriefbank AG (Pfandbriefbank) as well as the public sector covered bonds issued by Ireland-based Depfa ACS (Depfa ACS) and Luxembourg-based Hypo Pfandbrief Bank International S.A. (HPBI). At the same time, the mortgage covered bonds issued Germany-based Hypo Real Estate Bank International AG (Hypo Germany; HG) were placed on CreditWatch with developing implications.
The rating actions follow the announcement that Hypo Real Estate Holding (HRE; not rated), the owner of members of the Hypo Group, intends to acquire 100% of the Depfa shares.
The affirmation of the rated public sector covered bonds issued by the Germany-based entities (HI, HG, and Pfandbriefbank) reflects a review of the existing structures that corroborated the sound credit profile and cash flow adequacy of the cover pools to support payment of interest and principal of the outstanding Öffentliche Pfandbriefe (public sector covered bonds) in a timely manner even under stresses compatible with the current ‘AAA’ ratings–even in the currently unlikely scenario of the bank becoming unable to meet its other obligations.
The affirmation also reflects Standard & Poor’s view that an envisaged potential merger of the German cover pools under the umbrella of Pfandbriefbank–creating the world largest public sector covered bond issuer with a total cover pool of €87.1 billion available to back €83.8 billion covered bonds (at March 31, 2007)–will not add concentration or cash flow stresses incompatible with the rating, nor that the cover pools composition or risk profile will become significantly altered going forward. Furthermore, the affirmation reflects that regulatory aspects are not expected to threaten the planned merger.
The affirmation of the public sector covered bonds issued by Depfa ACS Bank and HBPI also reflects their intrinsic strength and the expectation that despite increased cooperation between these two entities in the future, both cover pools, owing to regulatory requirements, will remain separated and will have to be analyzed separately.
The CreditWatch with developing implications on the mortgage covered bonds issued by HI reflects that while HI’s cover pool today is sufficiently robust to maintain the current rating, the planned restructuring of HRE mortgage refinancing activities following an expected approval by its shareholders and regulators will also result in a merger of the mortgage cover pools of HI and HG. The latter’s cover pool is currently not rated by Standard & Poor’s.
At the end of March 2007, HI’s internationally focused commercial real estate cover pool of €7.8 billion (comprising 83% commercial and only 12% domestic exposures) is expected to be merged with HG’s cover pool comprising €19.8 billion cover pool, which, although also focused on commercial properties, is more strongly focused on German real estate lending (commercial: 71.4%; domestic: 94.4%)
Following initial talks, Standard & Poor’s expects to receive sufficiently detailed information to increase transparency on both banks’ cover pools as well as underwriting and risk strategies in light of the expected restructuring in the future. We will also monitor the regulatory or legal aspects of the planned mergers and expect to resolve the CreditWatch on HI’s mortgage covered bonds once sufficient comfort to resolve the CreditWatch has been established.
