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
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
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
Asset Analysis Criteria for Covered Bonds of European Public Entities