MOODY'S UPDATES RATING APPROACH FOR PFANDBRIEFE ISSUED BY GERMAN PUBLIC-LAW BANKS
LONDON, 20 September 2001 -- Moody's Investors Service has updated its rating approach to public-sector and mortgage Pfandbriefe issued by German public law banks, such as Landesbanken. The change in the rating approach will provide consistency with Moody's notching practice regarding Pfandbriefe issued by mortgage banks in Germany. This updated approach should remain appropriate even when Landesbanken's long-term ratings no longer benefit from statutory support mechanisms (for debt issued after July 2005 or debt issued after July 2001 and maturing after 2015).
Essentially, Moody's ratings of Pfandbriefe issued by Landesbanken will no longer be notched up from a theoretical implied long-term rating that is inferred from the bank's existing financial strength rating, thus discounting the additional protection coming from the external support mechanisms. According to Moody's updated approach, the ratings of Pfandbriefe issued by a Landesbank will reflect both the existence of the support mechanisms and the comparatively reduced severity-of-loss expectation for these securities compared to the unsecured senior and subordinated debt of the issuing bank. Thus, the ratings of Pfandbriefe issued by Landesbanken will be notched up from the bank's senior unsecured debt rating. This approach is in line with Moody's methodology for rating Pfandbriefe issued by mortgage banks in Germany.
Specifically, Moody's notes that default protection would be the same for both unsecured and secured creditors of a Landesbank given the statutory support mechanisms - as reflected by the current ratings of Landesbanken, ranging from Aaa to Aa3. On the other hand, loss severity for Pfandbriefe investors should be materially lower than for unsecured creditors owing to the collateral pool and the legal framework of Pfandbriefe.
Moody's points out that the depth of notching between the senior unsecured debt rating and the Pfandbrief rating will depend on the credit quality of the collateral pool. The extent of the notching possibilities for German mortgage banks are up to four notches for public sector Pfandbrief ratings and up to three notches for mortgage Pfandbrief ratings.
With respect to Landesbanken, Moody's will, however, continue to maintain a higher focus on the degree of loan diversification in Pfandbriefe's asset pools than is normally the case for mortgage banks. This would be more applicable to public-sector Pfandbriefe than to mortgage Pfandbriefe. Specifically, Moody's believes that a Landesbank is likely to be heavily engaged in lending to its own support providers - such as the Land government, the region's savings banks and/or the various public law entities, which in effect form part of the regional chain of support for such a Landesbank. A greater concentration of exposure to the support provider would reduce the level of additional protection through the collateral pool.
Moody's said that the updated rating approach to Landesbank Pfandbriefe should not involve any changes to the existing ratings of Pfandbriefe issued by Landesbanken -- all at Aaa.
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