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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)
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