Bangkok--19 Jun--Standard & Poor's
OVERVIEW
- We have assigned an 'A-/Stable' long-term rating and a 'A-2' short-term rating to Realkredit Danmark's existing issuances of "section 33e" bonds (junior covered bonds) out of its Capital Centres S and T.
- We have assigned these ratings based on our principles of credit ratings. The current approach does not envision any additional rating uplift from that of the senior unsecured debt rating on the issuer's parent bank as a result of the characteristics of these bonds.
- Section 33e bonds have a junior ranking claim on the cover pool assets from the capital center under which they are issued. The proceeds from the issuance of section 33e bonds must be placed in particularly secure assets, which are to be placed in separate accounts dedicated to the specific capital center.
- If the issuer defaults, payments on the section 33e bonds from Realkredit Danmark's Capital Centres S and T are deferred until all respective senior covered bonds have redeemed, unless the bankruptcy administrator is confident that the senior covered bonds can be repaid. The bonds are dual-recourse instruments as they are secured by the residual or remaining assets within the individual capital center, and will rank pari passu with the senior unsecured creditors' claims.
LONDON (Standard & Poor's) June 19, 2012--Standard & Poor's Ratings Servicestoday assigned a 'A-' long-term credit rating and a 'A-2' short-term rating toRealkredit Danmark A/S's issuances of Danish section 33e bonds (DKSE33e;Danish legislation-enabled junior ranking mortgage bonds) out of its CapitalCentres S and T. We have assigned a stable outlook to the long-term rating(see list below).
Standard & Poor's ratings address timely payment of interest and ultimatepayment of principal on or before legal final maturity of the bonds. We haveassigned these ratings based on our principles of credit ratings (see "Principles Of Credit Ratings," published on Feb. 16, 2011).
We understand that Realkredit Danmark has issued section 33e bonds to raisefunds for posting additional collateral in its capital centers issuing"saerligt daekkede realkreidtobligationer" (SDRO; Danish senior coveredbonds). Realkredit Danmark's Capital Centres S and T are existing capitalcenters which have separate program documentation and are specifically set upto allow the issuer to issue SDRO bonds. The section 33e bonds are also issuedunder separate documentation for Capital center S and Capital center T,respectively.
The 2007 amendment to the Danish covered bond legislation introduced the requirement to regularly revalue the collateral securing the mortgage loans inorder to make certain Danish covered bonds compliant with the CapitalRequirements Directive. With the amendment, the regulators introduced section33e bonds to allow mortgage credit institutions issuing SDROs or "saerligtdaekkede realkreditobligationer" (SDRO; Danish mortgage covered bonds) toraise capital in order to maintain sufficient overcollateralization in theevent that the loan-to-value ratio of the mortgage assets were to increaseabove regulatory limits.
The Danish covered bond legislation refers to section 33e loans as bonds thatare issued with the purpose of funding additional overcollateralization. Somemortgage banks refer to section 33e loans as "junior covered bonds" whileother market participants may refer to them as "issuance of senior debt inpursuance of section 33e of the Act on Mortgage loans and Mortgage Bonds etc".
We note that section 33e bonds rank junior to the traditional (senior) coveredbonds in the capital center that they are issued from, but rank senior to theissuer's senior unsecured debt for funds from the associated capital center.We are aware that any surplus of the cover pool after making payments tocovered bonds and section 33e bonds will be transferred to the bankruptcyestate. Not until then will the senior unsecured creditors have access toassets from the cover pool.
We consider that if the issuer defaults, principal and interest payments aredeferred until the redemption of all the covered bonds outstanding. Residualclaims of section 33e bond investors not fulfilled in the capital center rankpari passu with senior unsecured creditors' claims against all other assetsnot pledged to the mortgage bank's other cover pools. The bonds aredual-recourse instruments as they are secured by the residual or remainingassets within the individual capital center.
We understand that no acceleration occurs on the covered bonds, derivatives,or section 33e bonds if the mortgage credit institution is declared bankrupt.However, an administrator may pay back section 33e bondholders if theadministrator is confident that funds are sufficient to repay all remainingissued covered bonds and derivative counterparties registered in the specificcapital centers.
RATING RATIONALE
As we do not believe that the issuer can commit to or manage levels ofovercollateralization to support section 33e bonds that are similar to what wetypically see for standard covered bonds, we do not consider the benefit ofany recourse to the cover pool in our rating analysis. This is due to thespecific payment mechanics of the Danish section 33e bonds and their purposeto raise funds to provide additional overcollateralization for the seniorcovered bonds.
We also consider that, upon an issuer default, interest payments on the bondswould be deferred until such time as the senior covered bondholders can beguaranteed payment in full. Hence, in our opinion, section 33e noteholders areunlikely to receive timely payment interest. As our ratings address timelypayment of interest and ultimate payment of principal, we believe it is verylikely that our ratings on the section 33e bonds issued out of RealkreditDanmark's Capital Centres S and T would be lowered if the issuer defaults.
Based on these considerations, we will generally align our rating on theDanish section 33e covered bond issuances to the senior unsecured debt ratingon the issuer (normally a parent entity to the cover pool). Realkredit Danmarkis currently not a rated entity and consequently, we will align our ratings onthe section 33e bonds to the senior unsecured debt rating on the issuer'sparent Danske Bank A/S (A-/Stable/A-2).
Because the notes rank pari passu with the senior unsecured claims on theissuer in case the cover pool is not sufficient to repay the section 33ebonds, and because we give no benefit to the cover pool in our analysis of thesection 33e bonds, we consider our rating on the section 33e bonds should notbe substantially different to that on Danske Bank's senior unsecured debt. Asa result, we would generally expect our ratings on the section 33e bonds toreflect any changes in our ratings on Danske Bank's senior unsecured debt.
Consequently, our 'A-' long-term and 'A-2' short-term ratings on the section33e bonds are the same as our ratings on the issuer's parent bank's seniorunsecured debt. As a result, the outlook assigned to the long-term rating onthe section 33e bonds reflects the stable outlook assigned to the issuercredit rating on Danske Bank.
OTHER CONSIDERATIONS
Should an issuer choose to not refinance the section 33e bonds, this may leadto a decrease in the overcollateralization available to a capital center.Changes in available overcollateralization may lead to changes in the ratingson covered bonds issued out of Realkredit Danmark's Capital Centres S and T.
The issuance of Danish section 33e bonds is only one of the methods Danishcovered bond issuers are utilizing to meet the legal requirements ofadditional posting of collateral when house prices decline.
If the issuer becomes insolvent, all assets in the cover pool secure thepreferential claim of the outstanding covered bonds.
The Danish covered bond legislation requires that the proceeds from issuanceof section 33e bonds are invested and are a defined group of high qualityassets. Furthermore, the legislation states that any assets which are fundedby the issuance of section 33e bonds must remain in the capital center fromwhere the section 33e bonds were issued. This means that the part of theovercollateralization in a given capital center which the rating on the(senior) covered bonds relies on is in effect, committed to the capital centerand the management cannot remove it at their discretion as long as thecorresponding section 33e bonds are outstanding.
Our current ratings on SDRO issuances from Capital Centres S and T are'AAA/Stable/A-1+'. As of March 31, 2012, Capital Centres S and T had availableovercollateralization levels of 10.45% and 6.35%, respectively.
As of May 31, 2012, Realkredit Danmark had issued DKK17.2 billion worth ofsection 33e bonds with DKK4 billion issued from Capital Centre S and DKK13.2billion issued from Capital Centre T. We expect issuance to continue as longas house prices continue to fall in Denmark.