London, 03-31-98 -- Because of changes to the German Mortgage Banking Act, which take effect tomorrow -- April 1, 1998, Moody's reviewed its rating approach for both types of German Pfandbriefe – mortgage Pfandbriefe and public-sector Pfandbriefe -- issued by German mortgage banks, concluding that the current rating approach adequately takes into account these legislative modifications.
According to Moody's, the most rating-relevant change to the Mortgage Banking Act concerns the treatment of the asset pools securing Pfandbriefe in the event of bankruptcy proceedings. The previous uncertainty surrounding the asset pools' acceleration and inclusion in a bank's bankruptcy proceedings has been addressed, to the extent that the bank regulators can now legally initiate bankruptcy proceedings solely against a mortgage bank, while keeping the asset pools that meet the regulatory framework requirements distinctly separate. However, bankruptcy proceedings can still be initiated against the asset pools by the bank regulators, if these pools fail to comply with the stipulated criteria of the Mortgage Banking Act.
In the context of the changes to the Mortgage Banking Act, Moody's said that it will continue to follow its fundamental rating approach for German Pfandbriefe, whereby Pfandbrief ratings are driven by the creditworthiness of the issuing mortgage bank. However, Moody's upgraded the Hypothekenpfandbriefe (mortgage bonds) of four mortgage banks as well as the oeffentliche Pfandbriefe (public-sector secured bonds) of one mortgage bank. In Moody's opinion, these upgrades reflect the even more reduced likelihood of contamination of the asset pools from a mortgage bank in financial distress. The widened rating level span between a mortgage bank's long-term deposit rating and its Pfandbrief ratings recognises the already significantly reduced severity-of-loss for Pfandbrief investors, coupled with a now lower expected frequency of default in relation to a mortgage bank's unsecured creditors. Even so, absolute bankruptcy remoteness of the asset pools is not assured (as would be the case in mortgage backed security structures), since there is no formal recognition of over-collateralisation, alternate liquidity provision or an alternate service provider. As before, over-collateralisation of the asset pools is not a legal requirement of the Mortgage Banking Act. Whilst coincidental over-collateralisation of the respective asset pools at the time of a mortgage bank's bankruptcy is possible, its likelihood is considered by Moody's to be relatively low. To the extent that over-collateralisation should occur in such a stressed situation, the bank regulators would now have the ability to check the regulatory compliance of the asset pools before releasing any over-collateralisation back to the bank's bankruptcy estate. Once such a transfer of over-collateralisation from the asset pool has occurred, further asset substitution or replenishment would not be feasible.
In widening the rating differential between a mortgage bank's long-term deposit rating and its Pfandbrief ratings, Moody's also takes the view that, in a worst case scenario, where fully compliant asset pools may now be managed separately alongside an insolvent or bankrupt mortgage bank, such asset pools are consequently far more fungible. As such, the timely purchase by a healthy mortgage bank peer of such an asset pool is now expected to be both more straightforward and more likely. Even so, Moody's said that it continues to view mortgage Pfandbriefe in relation to public-sector Pfandbriefe of the same issuer to possess potentially different severity-of-loss characteristics.
The following ratings were raised:
Allgemeine Hypothekenbank AG – the bank's public-sector Pfandbriefe to Aa1 from Aa2 and its mortgage Pfandbriefe to Aa2 from Aa3.
Deutsche Pfandbrief und Hypothekenbank AG -- the bank's mortgage Pfandbriefe to Aaa from Aa1.
Hypothekenbank in Essen AG -- the bank's mortgage Pfandbriefe to Aaa from Aa1.
Muenchener Hypothekenbank eG – the bank's mortgage Pfandbriefe to Aaa from Aa1.
The following ratings were confirmed:
Allgemeine Hypothekenbank AG – the bank's long- and short-term deposits at A2 and P-1 respectively; the bank financial strength rating at C.
Bayerische Vereinsbank AG – the bank's public sector and mortgage Pfandbriefe at Aaa; long- and short-term deposits at Aa2 and P-1 respectively; the bank financial strength rating at B+.
Bayerische Hypotheken und Wechselbank AG -- the bank's public sector and mortgage Pfandbriefe at Aaa; long- and short-term deposits at Aa2 and P-1 respectively; the bank financial strength rating at B+.
Deutsche Pfandbrief und Hypothekenbank AG -- the bank's public-sector Pfandbriefe at Aaa; long- and short- term deposits at Aa3 and P-1 respectively; the bank financial strength rating at C+.
Frankfurter Hypothekenbank Centralboden AG -- the bank's public sector and mortgage Pfandbriefe at Aaa; long- and short-term deposits at Aa2 and P-1 respectively; the bank's financial strength rating at B.
Hypothekenbank in Essen AG -- the bank's public-sector Pfandbriefe at Aaa; short-term deposits at P-1; the bank financial strength rating at C.
Muenchener Hypothekenbank eG -- the bank's public-sector Pfandbriefe at Aaa; long-and short-term deposits at Aa3 and P-1 respectively; the bank's financial strength rating at C+.
RHEINHYP Rheinische Hypothekenbank AG – the bank's public-sector Pfandbriefe at Aaa; short-term deposits at P-1.
The following ratings remain on review for possible downgrade:
Hypothekenbank in Essen AG – the bank's mortgage Pfandbriefe at Aaa; the long-term deposits at Aa3.
RHEINHYP Rheinische Hypothekenbank AG – the bank's mortgage Pfandbriefe at Aaa; the long-term deposits at Aa2; the bank financial strength rating at B.
MOODY'S AFFIRMS ITS FUNDAMENTAL ANALYTICAL APPROACH IN RATING GERMAN PFANDBRIEFE, BUT WIDENS THE DIFFERENTIAL BETWEEN PFANDBRIEF RATINGS AND THE ISSUING MORTGAGE BANK'S UNSECURED LONG-TERM RATING
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