TEXT-S&P cuts Dexia Kommunalbank Deutschland covered bonds to 'A'

Fri Jan 11, 2013 3:19pm EST

OVERVIEW
     -- We have completed our review of the public sector covered bond program 
of Dexia Kommunalbank Deutschland AG (DKD) under our updated covered
bond counterparty criteria.
     -- In our view, the level of overcollateralization would only be 
commensurate with a rating of 'A'. 
     -- We are therefore lowering our ratings on the program to 'A' from 'AA-' 
and leaving them on CreditWatch negative in line with that on Dexia Credit 
Local (DCL). 
     -- We aim to resolve the CreditWatch status on DKD's public sector 
covered bond program shortly after resolving the CreditWatch on DCL.
    
     Jan 11 - Standard & Poor's Ratings Services today lowered to 'A' from 'AA-'
its ratings on the public-sector covered bond program of Dexia Kommunalbank
Deutschland AG (DKD). The ratings remain on CreditWatch where they were
originally placed with negative implications on Dec. 9, 2011. 

Today's rating action follows our review of the program's credit and cash flow 
information as of Sept. 30, 2012, and the implementation of our updated 
counterparty criteria framework (see "Counterparty Risk Framework Methodology 
And Assumptions," published Nov. 29, 2012, and "Covered Bonds Counterparty And 
Supporting Obligations Methodology And Assumptions," published May 31, 2012). 
We consider account bank and commingling risk to be relevant for this program. 

Under our updated counterparty criteria we regard the account bank risk and 
commingling risk to be mitigated by a weak link to the German National Bank 
(Bundesbank), one of DKD's account banks. As long as we believe Germany 
unlikely to exit the eurozone (European Economic And Monetary Union), we 
consider the Bundesbank's credit standing to be indistinguishable from that of 
the European Central Bank (AAA/Stable/A-1+). The weak link does not remove 
account bank and commingling risk, but creates a link between the rating on 
the covered bonds and that on an account bank (see "Assessing Credit Quality 
By The Weakest Link," published Feb. 13, 2012).

Based on the information available, we believe that remaining account bank and 
commingling risk is sufficiently covered by overcollateralization to allow a 
three-notch rating uplift above the 'BBB' issuer credit rating (ICR) on Dexia 
Credit Local (DCL; BBB/Watch Neg/A-2). We notch from the ICR on DCL because we 
consider DKD to be a core entity of DCL.

In addition, we understand that DKD intends to manage the cover pool at a 
rating level below the maximum potential covered bond rating of 'AA+' (see our 
five-step approach for rating covered bonds in "Revised Methodology And 
Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds," 
published on Dec. 16, 2009). We understand that the overcollateralization will 
remain close to the current level, which is only commensurate with an 'A' 
rating, all else being equal.

The CreditWatch on the covered bond ratings mirror that on DCL. If DCL were 
downgraded, DKD could in principle mitigate the effect on the covered bond 
ratings because it has the ability to gain further notches of uplift by 
increasing overcollateralization. However, we understand that DKD currently 
only intends to maintain the current level of support, which is only 
commensurate with an uplift of three notches. Any negative rating action on 
DCL would therefore result in a corresponding rating action on DKD's public 
sector covered bonds.

We aim to resolve the CreditWatch on DKD's public sector covered bond program 
shortly after resolving the CreditWatch on DCL.


RELATED CRITERIA AND RESEARCH 
     -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 
2012
     -- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
     -- Assessing Credit Quality By The Weakest Link, Feb. 13, 2012 
     -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised 
Methodology And Assumptions For Target Asset Spreads, April 24, 2012
     -- Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions, May 31, 2012
     -- European Structured Finance Scenario And Sensitivity Analysis: The 
Effects Of The Top Five Macroeconomic Factors, March 14, 2012
     -- Global Structured Finance Scenario And Sensitivity Analysis: The 
Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Advance Notice Of Proposed Criteria Change: Methodologies And 
Assumptions For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
     -- Methodology: Credit Stability Criteria, May 3, 2010
     -- Revised Methodology And Assumptions For Assessing Asset-Liability 
Mismatch Risk In Covered Bonds, Dec. 16, 2009
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Update To The Criteria For Rating German Residential Mortgage-Backed 
Securities, Jan. 6, 2009
     -- German Law Change Affects Mortgage Foreclosure Period Stresses, Nov. 
28, 2008
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 
2008
     -- A Listing Of S&P's New Actions Aimed At Strengthening The Ratings 
Process, Feb. 7, 2008
     -- CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or 
Local And Regional Governments, May 3, 2006
     -- Rating Pfandbriefe--The Analytical Perspective, April 8, 2004
     -- German Pfandbrief Framework Further Improved, March 30, 2004 
     -- Surviving Stress Scenarios: Assessing Asset Quality of Public Sector 
Covered Bond Collateral, Sept. 30, 2003
     -- Criteria For Rating German Residential Mortgage-Backed Securities, 
Aug. 31, 2001


RATINGS LIST

Downgraded; CreditWatch/Outlook Action

                              To                 From
Dexia Kommunalbank Deutschland AG
 Public-Sector Covered Bond Program (Oeffentliche Pfandbriefe)
    Issue Rating              A/Watch Neg        AA-/Watch Neg
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