Editor's note: When we published the press release on 22 September 2015, we erroneously stated that we also assigned ratings to the issuer's public-sector covered bonds. The issuer does not issue public-sector covered bonds and we have not assigned ratings to this covered bond type. We therefore have corrected the title of the press release.

Scope Ratings has today assigned Long-Term Ratings of AAA with Stable Outlook to Danish covered bonds (Saerligt Daekkede Obligationer – SDO) issued by Danske Bank A/S out of its cover pools C, D and I.

The ratings reflect Danske’s Issuer Credit-Strength Rating (ICSR) of A-/stable/S-1 (Danske Bank Issuer Rating Report, 9 June 2015) and the fundamental credit support of the legal framework and bank recovery and resolution regime. In combination, these elements support a maximum credit differentiation of up to six notches under our methodology. These ratings do not take the potential further credit support of up to additional three notches the cover pool analysis could provide into account.

Fundamental assessment supports a high credit differentiation above the bank’s rating
To determine the fundamental uplift, we have analysed the Danish legal and resolution framework. We have concluded that SDO’s issued by Danske benefit from the maximum uplift of six notches above the ICSR. (see the Danish section in Covered bond framework analysis – Analytical Considerations, published 31 July 2015).

Legal framework analysis
We conclude that the Danish legal covered bond framework allows a smooth transition of the covered bond structure away from the insolvent issuer. The legal provisions provide for the maintenance of the cover pool which supports the ongoing full and timely payment of outstanding covered bonds upon restructuring or insolvency with available proceeds. The Danish legal framework provides for relevant programme enhancements, in particular overcollateralisation, to remain available, valid and enforceable upon an insolvency of the issuer. In addition, Danish covered bond risk management requirements are among the strictest in Europe and are prescribed in the ‘general balance principles’ applicable to SDO’s. Compliance with the legal framework is monitored by the Danish FSA and an independent auditor.

Resolution regime analysis
We have assessed the Danish implementation of the Bank Recovery and Resolution Directive (BRRD) and the incentives that can prevent a regulatory intervention on the issuer to impact the covered bond’s credit quality and impair its ongoing performance.

In our view, the June 2015 implementation of the BRRD into Danish law supports the preferential treatment of Danish covered bonds upon issuer default-like situations. Covered bonds will not be bailed-in upon a regulatory intervention or in restructuring or potential wind-down.

Danske Bank is systemically important in the context of its market. Scope therefore believes it is in the public interest that upon resolution it would be recapitalised and not placed into insolvency. Accordingly, we expect eligible liabilities which are not excluded by the respective resolution authorities be bailed in towards the recapitalisation process. We view Danske Bank as having a substantial cushion of eligible bail-in-able liabilities – capital securities, other subordinated liabilities, and long-term senior unsecured debt – which represents a reassuringly ample protection for its covered bonds. In our view, a scenario in which bailed-in eligible liabilities are inadequate to stem losses and recapitalise the bank would be highly implausible.

The resolution regime-based credit differentiation also takes into account the high systemic relevance. Danish covered bonds comprise 147% of GDP which also reflects their importance for the refinancing of mortgage loans in Denmark. We also view positively the high share of domestic investors and proactive issuer community, which has continuously advanced the legal framework to maintain high standards and avoid negative repercussions from other regulatory developments on the product. Eventually this high importance might result in additional support for covered bonds.

Covered bond ratings assigned to Cover Pool C, D and I covered bonds
Danske Bank is active throughout Scandinavia and not only issues covered bonds directly, but also taps the market via subsidiaries (including Realkredit Danmark). Ratings assigned relate only to covered bonds issued by Danske Bank A/S and secured by cover pool C: comprising Swedish and Norwegian commercial and residential mortgage loans secured by rental housing, cooperative housing, agriculture and commercial properties; cover pool D: comprising Danish residential mortgage loans secured by single family homes and holiday houses as well as cover pool I: comprising Swedish and Norwegian mortgage loans secured with single family homes, cooperative housing and holiday houses.

Covered bonds issued out of one of the dedicated cover pools rank pari passu to each other and have no recourse to another cover pool. For the unsolicited ratings we have not analysed the cover pools. Both cover pools exhibit differences in credit quality, cash flow structure and protection levels provided (overcollateralisation). These can impact the assessment and potential additional credit differentiation from the rating analysis of the cover pool which could support an additional credit differentiation of up to three additional notches.

Rating change drivers
A negative development of the issuer rating or the outlook could impact the rating of the covered bonds if the additional benefit the cover pool analysis – which could provide an additional credit support of up to three notches - is not taken into account.. Only based on the fundamental supporting factors there is no rating buffer available. Current rating drivers for the covered bonds therefore mirror the rating drivers for the issuer.

We currently do not expect changes in the legal framework or in our assessment of the resolution regime or systemic support to negatively impact our assessment of the fundamental rating drivers for Danske Bank covered bonds.

The following ratings were assigned to Danske Bank’s covered bonds:

- Cover Pool D, Senior secured Danish mortgage covered bonds (SDO), AAA/Stable
- Cover Pool C, Senior secured Danish mortgage covered bonds (SDO), AAA/Stable
- Cover Pool I, Senior secured Danish mortgage covered bonds (SDO), AAA/Stable

The ratings assigned to Danske Banks’s covered bonds are (i) based on public information, (ii) not solicited by the issuer and (iii) without issuer participation in the process.

Related Research:
Danske Bank Issuer Rating Report, 9 June 2015
Covered Bond Framework Analysis – Analytical considerations, published 31 July 2015

Important information

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility

The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Karlo Fuchs, Executive Director.
Responsible for approving the rating: Stefan Bund, Chief Analytical Officer.

The rating concerns financial instruments which were evaluated for the first time by Scope Ratings AG. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest

The ratings assigned to Danske Bank’s covered bonds are (i) based on public information, (ii) not solicited by the issuer and (iii) without issuer participation in the process.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating

Available public information provided to investors by the issuer, official publications and data series by the central bank, regulators and research from reputable market participants. Scope Ratings considers the quality of the available information on the evaluated entity to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication

Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology

The methodology used for the rating assessment is “Covered Bond Rating Methodology” published in July 2015 as well as “General Structured Finance Rating Methodology” published 28 August 2015. The methodologies are available on www.scoperatings.com.
The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability

© 2015 Scope Corporation AG and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Capital Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

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