TEXT-Fitch affirms Sparebank 1 Boligkreditt covered bonds at 'AAA'
Jan 30 - Fitch Ratings has affirmed Sparebank 1 Boligkreditt's (S1B; 'A-'/Stable/'F2') mortgage covered bonds at 'AAA'/Stable following a review of the programme. S1B currently has NOK138bn (equivalent) covered bonds outstanding under the programme. The rating is based on S1B's Long-term Issuer Default Rating (IDR) of 'A-', the Discontinuity Cap (D-Cap) of 4 (moderate risk) and the overcollateralisation (OC) of 9.6% (disregarding internal exposures to shareholder banks rated below 'A'/'F1') that the issuer intends to maintain. For issuers rated 'F2' or above, Fitch gives credit to the lowest OC of the past 12 months, or, if higher, to the level of OC that the issuer intends to maintain. The 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) S1B's IDR was downgraded by one notch to 'BBB+' or lower; or (ii) the D-Cap fell by at least one category to 3 (moderate high risk) or lower; or (iii) the OC that Fitch takes into account in its analysis decreased below Fitch's 'AAA' breakeven OC of 9.6%. The D-Cap of 4 is driven by the moderate risk assessment of the liquidity gap and systemic risk and systemic alternative management risk components, which are the weakest of the D-Cap components. The cover pool specific alternative management component and the privileged derivatives are assessed as low risk from a discontinuity point of view and the asset segregation as very low. The 12-month extendible maturity on the covered bonds and the three-month interest reserve fund drive the liquidity gap and systemic risk assessment. The systemic alternative management reflects the challenges faced by an alternative manager to make timely payments on the bonds post issuer or parent company's default. Regarding the cover pool-specific alternative management, Fitch has a positive view of S1B's processes, data delivery and the market systems used that will likely lead to a less difficult transition to an alternative manager than internally-developed systems. As of end-September 2012, the cover pool consisted of 118,558 performing loans with a total outstanding balance of NOK141.4bn, as well as substitute assets of NOK15.8bn, including cash deposits held with shareholders banks rated below 'A'/'F1'. In its calculation of OC supporting a 'AAA' rating, Fitch only gives credit to exposures with entities rated at least 'A' or 'F1'. According to the issuer's calculations the mortgage loan portfolio had a weighted average current loan-to-value (LTV) of 50.5% and a WA original LTV of 58.8%. These figures are based on flexible loan amounts drawn to their pre-defined limits. The property values used for the current LTV calculation for the majority of the loans have been updated by Eiendomsverdi, an automated valuation model provider. The pool includes 6.4% of loans to individuals secured on shares in Norwegian housing associations. For these loans, Fitch has looked at the additional risk that a default of the housing cooperative could represent for the borrowers that are members of the cooperative. Currently, this is relatively small because of the low indebtedness of the cooperatives in the pool. Fitch has updated its Norwegian assets default assumptions and its Market Value Decline assumptions which resulted in slightly higher default rates assumed in a 'AAA' scenario, and in lower recovery rates for the defaulted mortgages. Fitch now communicates the maximum level of OC that supports the assigned covered bond rating. The current 'AAA' breakeven OC has increased to 9.6% from 9.0% driven by the higher refinancing spreads assumptions, the more conservative losses calculated for the portfolio and the shorter weighted average life for the covered bonds. Fitch has compared the cash flows from the cover pool in a wind-down situation, subject to stressed defaults and losses and under the management of a third party, to the payments due under the covered bonds. The cover assets have a weighted average life of 16.5 years, assuming no prepayments, and the covered bonds of 4.3 years. The mismatches between the bullet covered bonds and the amortising cover pool assets expose the programme to refinancing risk. However, this risk is mitigated to some extent by the high prepayment rates reported which drive down the average life of the mortgages. Fitch modelled the cost at which the pool would be refinanced using its updated refinancing spread assumptions (see "Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress" dated 14 November 2012 at www.fitchratings.com). Loans in the cover pool are denominated in NOK and pay a variable rate of interest, based on the originators' own rates. Most of the covered bonds pay a fixed rate of interest and are denominated in NOK, EUR USD and SEK. Liability swaps are in place to hedge the currency risk between the NOK cover assets and the EUR, USD and SEK liabilities and the interest rate risk between three month NIBOR and the fixed-rate owed on the covered bonds. The programme remains exposed to movements in the originators' variable rates versus three month NIBOR, which is taken into account in the agency's analysis. The Fitch breakeven OC for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 September 2012, 'Covered Bonds Counterparty Criteria', dated 25 July 2012, Covered Bonds Rating Criteria - Mortgage Liquidity & Refinancing Stress Addendum, dated 14 November 2012, and 'EMEA RMBS Master Rating Criteria', dated 7 June 2012 are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended Covered Bonds Counterparty Criteria Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum EMEA RMBS Master Rating Criteria