Today Verd Boligkreditt AS (Verd) announced that the nine banks owning Verd, organised under the De Samarbeidende Sparebankene alliance (DSS), entered into an agreement to affiliate the ten banks organised under the Lokalbankallianse (LBA) as additional owners of Verd.

According to the agreement, the LBA banks will be able to refinance eligible mortgage loans with covered bonds issued by Verd.

This agreement follows a letter of intent signed on 14 May 2020 (see Verd covered bond programme could size up after letter of intent signed with Lokalbankallianse) and is subject to permission from Finanstilsynet. The new banks are expected to start using Verd in the second quarter of 2021.

The ten Norwegian savings banks behind the LBA – Askim & Spydeberg Sparebank, Drangedal Sparebank, Nidaros Sparebank, Selbu Sparebank, Sparebank 68 Grader NORD, Sparebanken DIN, Stadsbygd Sparebank, Tolga-Os Sparebank, Ørland Sparebank and Aasen Sparebank – have terminated their membership agreements with Eika Group. The agreement, which expires on 31 December 2021, allows the LBA banks to use the covered bond-issuing entity of Eika Group. The LBA banks have now found an alternative way to refinance mortgage loans via OMF (obligasjoner med fortrinnsrett).

As of September 2020, Verd’s cover pool had a total outstanding of NOK 10.95bn of mainly Norwegian residential mortgage loans (see New analysis on mortgage covered bonds issued by Verd Boligkreditt AS). With the LBA banks entering Verd as new owners, Verd’s cover pool may double in size in the medium term. Even so, the cover pool will remain small compared to those of larger Norwegian covered bond issuers.

The contribution of additional cover assets will, over time, result in higher regional diversification. Both alliances consist of small local saving banks with comparable risk metrics. The DSS banks are more active in south-western Norway, while half of the LBA banks operate in the Trondelag region (Trondheim). With Sparebank 68 Grader Nord, the combined portfolio could further benefit from more diversification into northern Norway.

Any effect on the credit quality of Verd’s cover pool and covered bonds will only emerge slowly. This is because the LBA banks’ newly originated mortgage loans and eligible mortgage loans, currently held with Eika Boligkreditt, can only be released in line with the corresponding covered bonds’ maturities. The process of transferring the existing loan portfolio from Eika Boligkreditt to Verd is expected to take around five years.

Scope will monitor the proceedings closely to assess the impact of the additional owners on Verd’s covered bond rating (AAA/Stable). 

This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term.