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Jan 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed KLP Kommunekreditt AS’s (KLP; A-/Stable/F2) public sector covered bonds at ‘AAA’ with a Stable Outlook, following a periodic review of the programme.
The rating is based on KLP’s ‘A-’ Long-term Issuer Default Rating (IDR), the Discontinuity Cap (D-Cap) of 4 (moderate risk) and the overcollateralisation (OC) that Fitch takes into account in its analysis. The agency relies on the lowest level of OC observed within the past year, currently 18.1%, reflecting the issuer’s ‘F2’ Short-term IDR. The level of OC Fitch takes into account supports a ‘AA’ rating on a probability of default (PD) basis and allows for a two-notch recovery uplift reflecting outstanding recovery prospects on the bonds.
The unchanged D-Cap of 4 (moderate risk) results from the moderate risk assessment of the liquidity gap & systemic risk and the systemic alternative management components. The cover pool specific alternative management and privileged derivatives components have been classified as low risk. Asset segregation risk has been assessed as very low.
As of September 2013, KLP’s NOK17.925bn outstanding covered bonds were secured by a cover pool of NOK21.225bn, resulting in nominal OC of 18.4%. The pool consisted of 917 loans from 329 debtors totaling NOK17.895bn, in addition to substitute assets totaling NOK3.330bn, with the largest obligor representing 7%, and the 20 largest exposures accounting for 38.0% of the total loans.
In a ‘AAA’ scenario, Fitch’s breakeven OC remained stable at 17.0%. The main driver is the stressed credit loss of 21.2% (previously 15%) whereby stressed defaults and recoveries are 49.6% and 57.3%, respectively. The increase in credit risk stems from Fitch’s updated view that there is increased tail risk from the portfolio’s concentrated exposure to Norwegian sub-national debt.
The residual weighted average life of the pool is 11.2 years, versus 3.0 years for the covered bonds. Interest and currency risks are hedged with external counterparties.
The ‘AAA’ rating would be vulnerable to downgrade if any of the following occurred: (i) KLP’s IDR was downgraded by one notch to ‘BBB+’ or below; (ii) the D-Cap fell by one or more categories to 3 (moderate high risk) or lower; or (iii) the OC that Fitch considers in its analysis dropped below Fitch’s ‘AAA’ breakeven level of 17.0%. OC of 0%, as required by the Norwegian covered bond law, would trigger a four-notch downgrade to ‘A+'.
The Fitch breakeven OC for the covered bond rating will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC for the covered bond rating cannot be assumed to remain stable over time.
More details on the portfolio and Fitch’s analysis will be shortly available in a credit update at www.fitchratings.com.