-- 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
-- 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,
-- 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.
-- European Legal Criteria For Structured Finance Transactions, Aug. 28,
-- 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
Downgraded; CreditWatch/Outlook Action
Dexia Kommunalbank Deutschland AG
Public-Sector Covered Bond Program (Oeffentliche Pfandbriefe)
Issue Rating A/Watch Neg AA-/Watch Neg