TEXT-S&P rates DLR Kredit's General Capital Centre Covered bonds

Mon Nov 26, 2012 12:04pm EST

OVERVIEW
     -- We have assigned credit ratings of 'AAA/A-1+' to DLR Kredit's 
issuances of "Realkreditobligationer" (RO) out of its General Capital Centre. 
     -- The portfolio backing the bonds consists of first- or second-lien 
loans secured mainly on agriculture and commercial, but also residential 
properties in Denmark. 
     -- The stable outlook takes into account the current positive outlook on 
the issuer and our view that the issuer is willing and capable to maintain the 
'AAA' rating on the bonds.
    
LONDON (Standard & Poor's) Nov. 26, 2012--Standard & Poor's Ratings Services 
today assigned its 'AAA' long-term and 'A-1+' short-term credit ratings to the 
"Realkreditobligationer" (RO; Danish legislation-enabled mortgage covered 
bonds) issued by DLR Kredit A/S (BBB+/Positive/A-2) out of its General Capital 
Centre. The outlook is stable (see list below).

DLR Kredit acts as a mortgage bank for its owners, which currently comprise 80 
local and regional banks, the largest of which are Jyske Bank, Sydbank, and 
Spar Nord Bank.

DLR Kredit started as an independent specialized mortgage bank for agriculture 
lending. Following an ownership change in 2001, the bank expanded its lending 
activities to include the financing of office and retail properties and 
private rental properties, as well as subsidized housing and private 
residential properties. Although the lending model has further diversified, 
the issuer remains the main agricultural lender in Denmark. 

Most of DLR Kredit's mortgages are originated by its owner banks, which also 
provide the ongoing servicing. DLR Kredit provides the banks with origination 
and valuation tools and the issuer grants and underwrites each loan based on 
its valuation of the collateral and the credit assessment it carries out.

DLR Kredit's General Capital Centre is an existing capital center and has 
separate bond documentation. The capital center is not currently actively 
issuing ROs and the refinancing of adjustable-rate mortgage (ARM) bonds takes 
place through DLR Kredit's Capital Centre B, which will continue to be used 
when refinancing ARMs and when financing new mortgage loans. Traditionally, 
the agricultural segment has preferred variable-interest-rate mortgage loans 
and this is reflected in the type of bonds issued from the capital center.

Table 1
Current Maturity Distribution

Bond characteristics     Vol.
                       (Mil. DKK)*           %

Callable bonds           28.9             95.3
ARM bonds                 0.6              1.9
Index bonds              0.01             0.04
Non-convertible annuity   0.8              2.7
Total                    30.3            100.0
DKK--Denmark krone.
*Of the loans, 34.6% are originated in euros.

If the issuer becomes insolvent, the covered bondholders have recourse to a 
separate, ringfenced capital center, and a capital center reserve fund. 
Furthermore, an assigned administrator (Kurator) would administer the cover 
pool, and if necessary, refinance the mortgage loans.

The General Capital Centre consists of loans secured by mortgages on 
agricultural, commercial, and some residential properties in Denmark. The 
loans are concentrated outside of the major cities in Denmark, in line with 
the issuer's traditional focus on the agriculture segment. In our credit 
analysis, we have assumed that agricultural properties reported as being in 
urban areas, such as Copenhagen, are counted as nonurban properties.

Table 2
Property Distribution By Type (%)

Single family                      5.75
Small agriculture                 12.73
Agriculture                       60.20
Retail                            13.56
Private rental (commercial)        7.30
Industry                           0.22
Subsidized housing                 0.08
Tier 2 Other (educational)         0.14

Table 3
Geographical Distribution (%)

Denmark                        100.0
Copenhagen                       5.5
Copenhagen (non-urban)           0.6
Zealand                          4.0
Zealand (non-urban)              7.9
Central Jutland                  6.6
Central Jutland (non-urban)     19.4
South Denmark                   11.4
South Denmark (non-urban)       23.2
North Jutland                    4.1
North Jutland (non-urban)       17.3

We have reviewed the asset and cash flow information provided and projected as 
of June 30, 2012, to determine a "category 1" program categorization for 
Capital Centre B and a current asset-liability mismatch (ALMM) measure of 
"low." According to our covered bond criteria, the combination of both factors 
could allow for a seven-notch uplift above the issuer credit rating (see 
"Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch 
Risk In Covered Bonds," published on Dec. 16, 2009).

By comparing our assessment of the target credit enhancement with the 
available credit enhancement, we concluded that the cover pool can fully 
support the potential rating uplift for our 'AAA' ratings on these 
legislation-enabled mortgage covered bonds. 

The stable outlook reflects our view that although adverse changes to our 
counterparty credit rating on DLR Kredit, or to our ALMM measure, would 
automatically result in a change to the covered bond rating, the issuer is 
willing to maintain the 'AAA' rating. The positive outlook on the issuer 
rating further strengthens our view that DLR Kredit can manage the covered 
bonds under stress levels commensurate with our ratings. 

Table 4
Capital Centre B's Key Characteristics (As Of June 30, 2012)

Classification of ALMM mismatch                 Low
Program categorization                            1
Maximum potential rating                        AAA
Current available credit enhancement (%)       6.82
Target credit enhancement commensurate with
the highest credit rating (%)                  5.14

Note that we calculate the current credit enhancement as (assets - 
liabilities)/liabilities. ALMM--Asset-liability mismatch.
   
TRANSACTION SUMMARY AND PORTFOLIO CHARACTERISTICS

Table 5
Key Portfolio Characteristics (As Of June 30, 2012)

Total principal balance (DKK)   32,086,305,476
Bonds outstanding (DKK)         30,058,305,476
Total number of loans                   19,595
Largest loan value (DKK)         934,868,992.0
Average loan size (DKK)            1,534,003.7

Weighted-average LTV ratio 
(whole pool, %)                      44.76

Educational and 
subsidized housing (%)                   57.10
Agriculture and commercial (%)           44.73
Single family (%)                        44.75

Level of arrears (whole pool, %)          1.33

Educational and
subsidized housing (%)                    1.08
Agriculture and commercial (%)            1.17
Single family (%)                         2.05

Defaulted loans (whole pool, %)           0.69

Weighted-average seasoning 
(whole pool, months)                     159.8

Agriculture and commercial               158.0
Single family 
including "private agriculture"          168.9

Proportion of ARMs (%)                    1.93
Proportion of variable-rate loans (%)    51.93
Proportion of IO loans (%)                 0.3
Top-20 loans as % of pool                  6.5
Reserve fund (%)                          6.44

Reserve fund composition:

DLR SDOs (%)                             83.94
DLR ROs (%)                               5.29
Other Danish covered bonds (SDO) (%)     10.60
Cash                                      1.08

 Based on Standard & Poor's adjusted calculation.

LTV--Loan-to-value.
IO--Interest-only.
ARMs--Adjustable-rate mortgages.
RO--"Realkreditobligationer."
SDO--"saerligt daekkede obligationer."
  
Our credit analysis accounts for these characteristics and comprises: 
     -- The determination of the weighted-average foreclosure frequency (WAFF) 
ratio, which we essentially base on the loan-to-value (LTV) ratio of the 
underlying borrowers; and 
     -- The determination of the weighted-average loss severity (WALS) ratio, 
which we derive from the LTV ratio and the expected market value decline of 
the property. 
  
The product of the WAFF and WALS is the net loss that we assume may affect the 
portfolio in a 'AAA' scenario. At a 'AAA' rating level, the closing WAFF and 
WALS results expected as of June 30, 2012 are:

WAFF                       26.10%
WALS                       16.86%

Assumed net credit loss
(WAFF x WALS)               4.40%

While we do not expect new origination and issuance from the General Capital 
Centre, we do anticipate that the issuer will actively manage and maintain the 
current credit composition and overcollateralization of the capital center. 
The final rating reflects that the issuer has amended the program 
documentation to address bank account and commingling risk; the revised 
contracts meet the expectations laid out in Standard & Poor's counterparty 
criteria for this rating level. 

RELATED CRITERIA AND RESEARCH 
     -- DLR Kredit Outlook Positive On Improved Capitalization; 'BBB+/A-2' 
Ratings Affirmed, Off CreditWatch Positive, Sept. 7, 2012
     -- DLR Kredit's Capital Centre B Covered Bond Issuances Assigned 
'AAA/A-1+' Ratings; Outlook Stable, Oct. 24, 2012Covered Bond Ratings 
Framework: Methodology And Assumptions, June 26, 2012
     -- Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions, May 31, 2012 
     -- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012 
     -- Global Investment Criteria For Temporary Investments in Transaction 
Accounts, May 31, 2012 
     -- Methodology And Assumptions For Analyzing Mortgage Collateral In 
Danish Covered Bonds, May 2, 2012
     -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised 
Methodology And Assumptions For Target Asset Spreads, April 24, 2012
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Methodology: Credit Stability Criteria, May 3, 2010
     -- Revised Methodology And Assumptions For Assessing Asset-Liability 
Mismatch Risk In Covered Bonds, Dec. 16, 2009 
     -- Methodology And Assumptions: Update To The Cash Flow Criteria For 
European RMBS Transactions, Jan. 6, 2009
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 
2008 
     -- Methodology & Assumptions: Applying The Derivative Counterparty 
Framework To Covered Bonds, Feb. 26, 2008 
     -- A Listing Of S&P's New Actions Aimed At Strengthening The Ratings 
Process, Feb. 7, 2008 
     -- Revised Framework For Applying Counterparty And Supporting Party 
Criteria, May 8, 2007 
     -- Expanding European Covered Bond Universe Puts Spotlight Oon Key 
Analytics, July 16, 2004 
     -- Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003 
     -- Rating Pfandbriefe--The Analytical Perspective Jan. 27, 2003 


RATINGS LIST

Program/Rating
Country: Covered bond type

RATINGS AND OUTLOOK ASSIGNED
  
DLR Kredit A/S - General Capital Centre 
Long-term: AAA/Stable
Short-term: A-1+
Denmark: "Realkreditobligationer" (Legislation-Enabled Mortgage Bonds)