TEXT-Fitch affirms KLP's public sector covered bonds at 'AAA'
Jan 31 - Fitch Ratings has affirmed KLP Kommunekreditt AS's (KLP Kommunekreditt; 'A-'/Stable/'F2') covered bonds at 'AAA' with a Stable Outlook, following the publication of the agency's Asset Analysis Criteria for Covered Bonds of European Public Entities (see 'Fitch: Criteria for the Asset Analysis of European Public Entities' Covered Bonds' dated 30 January 2013 at www.fitchratings.com). The covered bonds' rating is based on KLP Kommunekreditt's Long-term Issuer Default Rating (IDR) of 'A-', a Discontinuity Cap (D-Cap) of 4 (Moderate Risk) and the lowest observed overcollateralisation (OC) over the past 12 months that Fitch takes into account in its analysis, which is currently 18.6%. In terms of sensitivity of the covered bond rating - all else being equal - the 'AAA' rating would be vulnerable to downgrade if any of the following occurred: (i) the IDR was downgraded by one or more notches; or (ii) the D-Cap fell by one category or more; or (iii) the OC level Fitch takes into account in its analysis decreases by more than 1.6% to go below the agency's 'AAA' breakeven level of 17.0%, previously 16.0%. The Outlook on the covered bonds is Stable, as the Outlook on the issuer's IDR is Stable. The issuer is a specialised, wholly owned subsidiary of KLP Banken AS ('A-'/Stable/'F2'), which in turn is 100% owned by Kommunal Landspensjonskasse ('A'/Stable), one of Norway's largest life insurers. It was established in August 2009 and in the same year was granted its licence to operate as a regulated covered bonds issuer pursuant to the Amendments of Chapter 2, Subsection IV of the Norwegian Financial Institutions Act of 1988. The covered bonds are secured over a cover pool of exposures to public-sector entities in Norway. As of 31 December 2012 the cover pool amounted to NOK24.020bn (including NOK4.596bn of substitute assets). It consisted of 994 assets from 348 debtors, with the largest obligor representing 5.3%, and the 20 largest exposures accounting for 29.8% of the total cover pool. In a 'AAA' scenario, Fitch modelled an expected loss rate of 15.0%, (previously 13.9%) for the total cover pool, driven by the credit quality and concentration of the underlying obligors. In this scenario, the Kingdom of Norway ('AAA'/Stable/'F1+') is assumed to remain solvent and Fitch gave credit to the geographical diversification in the pool and the country's centralised framework. The residual weighted average life of the pool is 11.5 years, versus 3 years for the covered bonds. In a wind-down situation for the cover pool, this creates the need to refinance part of the cover pool to meet payments on the covered bonds. This was modelled in Fitch's cash-flow analysis. Interest and currency risks are mitigated, as the covered bonds are swapped into floating rate (three-month Nibor) in NOK and the assets in the cover pool that do not bear a floating rate were swapped into the same rate. Finally, 37.0% of assets bear a variable rate of interest that is not tied to Nibor. The basis risk between this rate and Nibor is mitigated by the possibility for the issuer to increase the rate paid by the borrowers with a 14-day notice period. Fitch will monitor the key characteristics of the cover assets and outstanding covered bonds on an ongoing basis, and check whether the OC taken into account in its analysis provides protection commensurate with the rating. Additional information is available on 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, 'Counterparty Criteria for Structured Finance Transactions', dated 30 May 2012, 'Covered Bonds Counterparty Criteria', dated 25 July 2012, 'Covered Bonds Rating Criteria - Public-Sector Spread Assumption Addendum', dated 28 November 2012, 'Asset Analysis Criteria for Covered Bonds of European Public Entities', dated 30 January 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended Counterparty Criteria for Structured Finance Transactions Covered Bonds Counterparty Criteria Covered Bonds Rating Criteria - Public Sector Liquidity & Spread Assumption Addendum Asset Analysis Criteria for Covered Bonds of European Public Entities