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Scope affirms KfW's rating at AAA with Stable Outlook
Rating action
Scope Ratings today has affirmed its AAA issuer rating for KfW. The AAA senior unsecured debt and the S-1+ short-term debt ratings were also affirmed. The Outlook for all ratings remains Stable.
Rating rationale
KfW is the largest German government development agency and one of the largest sub-sovereign issuers in Europe. Under the direction of the Federal Finance Ministry and within a mandate set by law, KfW plays a critical role for implementing economic policy in Germany.
Most recently, KfW took a leading role in Germany’s pandemic response programme by committing EUR 34bn in advances to corporate and SME borrowers during the first half of 2020. As part of the pandemic response, KfW can receive up to EUR 100bn additional funding directly from the Federal Republic’s Economic Stabilisation Fund. KfW plans to raise EUR 30bn from the fund this year, in addition to its regular funding programme that was scaled back to EUR 65bn compared to 80.6bn in 2019. As of June 2020, KfW had raised EUR 35.9bn across a variety of currencies and maturities. KfW’s excellent market access is further supplemented by an increasingly active green bond programme backed by lending to climate-friendly projects.
KfW maintains a low risk profile in its domestic promotional activity as credit risk is borne by the intermediate banks that lend out the funds to end-borrowers. In some cases, like the pandemic support programmes, KfW receives additional indemnities directly from the government. Its international trade and project finance operations as well as certain domestic activities such as equity investments and student loans expose KfW to valuation risks that are borne by its own balance sheet.
Consequently, we expect KfW to display earnings volatility during periods of economic stress. The Q1 net loss of EUR 592mn this year reflects the extraordinary impact of the Covid-19 induced global economic downturn but is still well within KfW’s risk-bearing capacity. As of March 2020, KfW had a Tier 1 capital ratio of 24% and available financial resources of EUR 30bn. Other counterparty, market, liquidity and operational risks are managed in a prudent manner, reflecting the extensive investment into risk management and compliance processes in recent years.
Supervised by BaFin, KfW is subject to German and EU banking law, apart from the BRRD and certain other provisions. Its highly regulated status provides KfW with a very strong liquidity position. KfW has access to ECB funding, including TLTRO III, which it tapped for EUR 13.4bn in June. KfW’s bonds, which carry a zero percent risk weighting in the EU and other banking jurisdictions, are part of the ECB’s ongoing asset purchases, including the Public Sector Purchase Programme (PSPP) and the new Pandemic Emergency Purchase Programme (PEPP).
Rating drivers
KfW’s current and future obligations carry an explicit and unconditional guarantee by the Federal Republic of Germany1,2, thus providing creditors with direct recourse in case the agency cannot meet its obligations on a timely basis. In addition, KfW benefits from a maintenance obligation by the Federal Republic under the principle of Anstaltslast. Chartered under public law (AöR), KfW cannot be subject to insolvency proceedings and is exempt from the EU’s BRRD. Given KfW’s high strategic importance and clearly defined public mission, Scope believes that the Federal Republic as 80% owner will provide extraordinary support to KfW should it be required.
Rating-change drivers
Any material changes in the sovereign creditworthiness of the Federal Republic of Germany resulting in a downgrade of Scope’s sovereign rating assessment (AAA/Stable)1.
Any material changes to credit support provided by the Federal Republic of Germany, notably the explicit guarantee2, public law status, Anstaltslast and exemptions from insolvency law and taxation.
Rating driver references
1. Germany Sovereign Rating
2. Guarantee of the Federal Republic of Germany
Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed
Methodology
The methodology/ies used for this rating(s) and/or rating outlook(s) (Government-Related Entitity Methodology, 6 July 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain and the rated entity.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactoryThe information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Dierk Brandenburg, Managing Director
Person responsible for approval of the rating: Pauline Lambert, Executive Director
The ratings/outlooks were first released by Scope on 4 December 2015.
Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.
Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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 does not, 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 other 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 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 GmbH at Lennéstraße 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.