OREANDA-NEWS. December 22, 2015. Ratings of German public sector covered bonds, or Pfandbriefe, will not be affected by the expiry of most government guarantees on selected Landesbank and savings bank liabilities at end-2015 because the overall level of protection provided by the cover pools will remain high, says Fitch Ratings.

Government-guaranteed securities were commonly used as collateral in public-sector Pfandbriefe programmes. The roll-off of guarantees in line with a long-standing agreement with the European Commission comes as no surprise because a lengthy transition period since 2005 meant that government guarantees remained in place through grandfathering.

The composition of German public sector cover pools will weaken if maturing grandfathered debt is not replaced by debt issued or guaranteed by the German government. But we estimate that expected losses for these cover pools would increase by only an average of 1%. The high ratings we assign to the corresponding covered bonds are unlikely to be affected as long as issuers maintain sufficient overcollateralisation in their programmes. We calculate that overcollateralisation, which provides a buffer above break-even for the assigned ratings averages 16%, more than sufficient to compensate for any credit quality weakening in the cover pool.

The amount of grandfathered government-guaranteed liabilities included in the cover pools of Fitch-rated German public sector covered bond programmes varies considerably. Some cover pools include none of these exposures, while others contain as much as 20%. But on average the proportion of grandfathered debt securing Fitch-rated German public sector Pfandbriefe programmes is below 10%.

Most of these cover assets mature at end-2015, to coincide with the expiry of the guarantee, but there are a few exceptions for debt with original maturity dates of more than 15 years issued before July 2001. Strategies for replacing the guaranteed cover assets vary among issuers. Identifying alternative highly rated assets may prove challenging and some issuers plan to shrink cover pool volumes because the public sector Pfandbriefe no longer represent a core source of funding for them.