Moody's Investors Service is shifting its rating methodology for Pfandbriefe, introducing a new ratings floor for issuers of this paper. It could spell positive upside potential for securitizations linked to public and mortgage sector Pfandbriefe, said analysts at Dresdner Kleinwort Wasserstein.

Issuing banks with an issuer rating of investment grade will, going forward, receive ratings no lower than Aa2' for public sector Pfandbriefe and Aa3' for mortgage sector Pfandbriefe. The new methodology is awaiting changes by the German regulator (BAFin) to the procedure of calculating the net present value of covered mortgages and public sector Pfandbriefe which is expected in the coming weeks. Moody's will continue to apply the three to four notch rating differential for issuers with better ratings.

The introduction of the new net present value requirements is expected to augment security for the Pfandbriefe holder. In particular, this will protect the value of the cover pool against interest rate risks. "This new provision creates a liquidity buffer to mitigate substitution risk," said analysts. "Such a buffer is likely to allow Pfandbriefe to continue performing in the case of issuer bankruptcy if the value of cover assets were depleted due to market risks or other reasons, including credit risks."

This new ratings floor will primarily benefit issuers whose weaker credit worthiness stems from elements not necessarily linked to the quality of the covered pools. WestHyp and HVB real estate Pfandbriefe are rated below the announced rating floor and could benefit from a higher ratings going forward which would affect tranches of the securitizations linked to these banks. Tranches of securitizations that could be positively affected include the Class B tranches of Duke 2002 Ltd, Dutch Dream 2001-V and Classic Finance B.V. Petra III.

Moody's also noted that as the structured covered bond universe expands throughout Europe issuers are beginning to combine the benefits of existing covered bond frameworks with securitization techniques. Such protection mechanisms can reduce the expected loss to achieve ratings up to a Aaa.' "In some circumstances certain issuers or market participants have chosen to enhance covered bond rating by entering into contractual agreements to reduce risks for investors, using structural features used in securitization," said one analyst. "In such cases we have used structured finance rating approach to account for the reduction in expected loss of the securities."

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