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Scope assigns AA- / Stable ratings to Dexia Kommunalbank Deutschland’s public-sector covered bonds
Scope today has assigned a AA- long-term rating with a Stable Outlook to the EUR 19.3bn of outstanding public-sector covered bonds (Öffentliche Pfandbriefe or OePf), issued by Dexia Kommunalbank Deutschland AG (DKD). The covered bond ratings reflect Scope’s credit assessment of the issuer, further enhanced by the credit benefit from the cover pool. The sound asset quality of the cover pool, resulting in low expected credit losses, combined with the available overcollateralisation, (OC) allows it to mitigate the limited market risk and moderate maturity mismatches of the covered bonds. When stressing the risks, the cover pool can support a credit differentiation of six notches above the rating of the issuer.
The rating also incorporates the fundamental credit-positive impact of the German legal covered bond framework and the benefits of the resolution regime. However, Scope’s assessment also reflects that Dexia Group is in an orderly wind-down after having received state support and being bailed out. Therefore, Scope expects it is less likely for DKD, than for other OePf issuers, that regulators will use all available resolution tools to ensure its further maintenance with a view to preserve critical functions. In Scope’s view this translates into a fundamental credit differentiation of five notches to the issuer rating.
The covered bond analysis allows for a higher rating uplift than the sole reflection of the fundamental legal and resolution regime analysis.
Scope has assigned and monitors a private rating on DKD. Its credit assessment of the issuer, DKD, reflects the limits the public-sector business faces in Dexia Group’s orderly resolution and unwinding, but helped by a letter of support from DKD’s parent, Dexia Credit Local, and the quality of assets remaining on the balance sheet.
In Scope’s view DKD’s limited capital buffer and low profitability means it could require the bank to resort to the letter of support in the future. Dexia Credit Local’s state guarantee does not apply to its subsidiaries and the letter of support is one of many other commitments Dexia Credit Local has vis-à-vis its other affiliates.
DKD’S OePf have full recourse to the issuer and a dedicated cover pool secured by eligible public-sector assets predominantly from Germany. All covered bonds issued by the bank rank pari passu, regardless of whether they are issued using standalone documentation or under an issuance programme.
Outlook: Stable
Scope has assigned a Stable Outlook to the OePf issued by DKD, which reflects: i) the cover pool’s resilience against moderate adverse changes in the risk structure; ii) Scope’s view on how likely changes in the cover pool’s risk structure would affect the rating; iii) and the stability of the issuer assessment. Further, a one-notch downgrade of the issuer’s creditworthiness is unlikely to affect the covered bond rating.
The rating could deteriorate if the evolution of the cover pool’s risk profile and cash flow structure was worse than expected. A downgrade by more than one notch, driven by the cover pool’s deterioration, is currently unlikely, however, as Scope’s view on the issuer, and support from the legal and resolution framework, creates a floor for the covered bond rating.
The covered bond rating could be upgraded if Scope were to upgrade the issuer, the issuer reduces the asset-liability mismatch of the covered bonds or provides a permanently higher OC. Given the past management of OC, and Scope’s credit view on the issuer, an OC-driven upgrade would only be considered if the issuer communicates robustly to the capital markets that additional OC levels will be kept permanently.
NOTES
Scope's rating report including key rating drivers, details about the analysis and important disclosures is freely available on www.scoperatings.com.
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 and Dr. Sven Janssen
The rating analysis has been prepared by Karlo Fuchs, Executive Director.
Responsible for approving the rating: Guillaume Jolivet, Managing Director.
Rating history for the covered bond rating
Date; Rating action; Debt type, Rating/ Outlook
04.05.2016; First assignment; Senior Secured public sector covered bonds; AA-/ Stable
The rating concerns a debt type of issuer which was evaluated for the first time by Scope Ratings AG. Scope had already assigned private ratings for the rated instruments in accordance with Regulation (EC) No 1060/2009 on rating agencies, as amended by Regulations (EU) No 513/2011 and (EU) No 462/2013.
Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but with a mandate of Dexia Kommunalbank Deutschland AG (solicited)
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
Website of the rated entity/issuer, annual reports/quarterly reports of the rated entity/issuer as well as public covered bond specific reports, current performance information as well as confidential information on the composition of the cover pool composition and related cash flow structures, Data provided by external data providers, Interview with the rated entity, Press reports, official publications and data series by the central bank 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 main methodologies applicable for the covered bond rating are: “Covered Bond Rating Methodology”, published July 2015, ‘Rating Methodology for Counterparty Risk in Structured Finance Transactions’ published 10 August 2015, “General Structured Finance Rating Methodology”, published 28 August 2015.
For the private credit rating of the issuer we also applied the principles contained in the “Bank Rating Methodology” dated May 2015.
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
© 2016 Scope Corporation AG and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor 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.
Rating issued by
Scope Ratings AG, Lennéstrasse 5, 10785 Berlin
