Scope affirms AAA rating on SSB Boligkreditt’s Norwegian mortgage-covered bonds – Outlook Stable
The issuer's credit strength combined with fundamental and cover pool support result in the highest rating. The soft-bullet profile and overcollateralisation reduce risks from maturity mismatches and low-LTV cover assets are resilient to high stresses.
Scope Ratings GmbH (Scope) has today affirmed the AAA rating with a Stable Outlook on the Norwegian covered bonds (obligasjoner med fortrinnsrett) issued by the specialised mortgage bank SSB Boligkreditt AS (SSBB), the fully owned subsidiary of Sandnes Sparebank (Sandnes).
Key rating drivers
Solid issuer quality (positive)1. The A- issuer rating with a Stable Outlook reflects the parent’s (Sandnes) well-established franchise in south-west Norway, solid and resilient earnings capabilities, and reassuring prudential metrics.
Cover pool support (positive)2,3. Cover pool support is the primary rating driver and adds up to eight notches of rating uplift. This is reflected by:
The cover pool complexity score (positive). Scope has assigned a cover pool complexity score of 1. This score reflects the issuer’s management of the interplay between complexity and the transparency provided to investors. It allows for a maximum uplift of three notches on top of the fundamental uplift.
Overcollateralisation (positive). As of 31 December 2021, available overcollateralisation was 25.7%. This level provides protection against market and credit risks and is well above the unchanged 4.0% minimum that supports the cover pool uplift.
Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans. The cover assets benefit from a low average loan-to-value ratio of 52.0% and moderate granularity, with the top 10 exposures accounting for 0.8% only.
- Market risks (negative). There is no foreign currency or interest rate risk. All bonds are denominated in local currency (NOK). 26.7% of the bonds are fixed rate but effectively hedged with four different counterparties. This matches the profile of the cover assets. However, the programme is exposed to maturity mismatches. In the case of SSBB’s covered bonds, these arise from stressed asset prepayments (high) reducing the available excess spread together with a rising interest rate scenario.
Fundamental credit support (positive)3. Fundamental credit support provides the covered bonds with five notches of uplift above Scope’s rating on SSBB. As such, one additional notch from cover pool support is needed to raise the covered bond rating to the highest achievable level.
Scope’s Stable Outlook on the mortgage-covered bonds reflects the stable outlook on the issuer’s credit quality and a rating buffer of two notches from unused cover pool support. The rating may be downgraded upon: i) a deterioration in Scope’s view on the credit quality of the issuer by more than two notches; ii) a deterioration in Scope’s view on fundamental support factors relevant to the issuer and Norwegian mortgage-covered bonds in general as well as on the interplay between complexity and transparency; and/or iii) an inability of the cover pool to provide additional rating uplift.
Quantitative analysis and assumptions
Scope’s cash flow analysis projected defaults for the mortgage cover pool assuming an inverse Gaussian distribution. Scope derived an effective weighted-average lifetime mean default rate of 8.0% with a coefficient of variation of 60%.
Scope assumed asset-recovery rates ranging between 99.1% in the base scenario and 79.8% in the stressed scenario for the mortgage loans.
Assumptions for Scope’s rating-distance-dependent market value declines reflect developments in the Norwegian housing market and its unique characteristics. An additional fire-sale discount of 20% was applied to account for property sales under non-standard or distressed conditions in more rural areas of Norway. The total stressed security value haircuts for the properties securing the mortgage loans ranged between 52.5% and 67.5% (depending on the location of the property). On top of that, Scope applied 2.5% for variable costs and NOK 70,000 of fixed liquidation costs.
Scope analysed substitute asset defaults with a non-parametric distribution using a Monte Carlo method. A correlation factor of 22% was assumed. Conservatively, Scope derived its default expectation based on the issuer’s credit view of all exposures. The low default rate of 0.15% and very high coefficient of variation reflect high individual credit quality but also very high obligor concentration. The asset recovery rate assumptions ranged between 100% in the base case and 59% in the most stressed scenario.
Overall, credit risk only accounts for 2.0pp of the 4.0% rating-supporting overcollateralisation.
Scope used the resulting loss distributions and default timings to project the covered bond programme’s losses and reflect its amortisation structure. The analysis also incorporated the impact of rating-distance-dependent interest rate stresses as well as different prepayment scenarios. Scope tested for low (1%) and high (up to 15%) prepayments to stress the mortgage programme’s sensitivity to unscheduled repayments.
Scope assumed a recovery lag of 24 months for residential loans originated by the owner banks. This is based on an analysis of Norwegian enforcement processes, which reflects the fact that the collateral’s regionality and strong dependence on the highly volatile oil sector may cause delays in recoveries. A recovery lag of 24 months was assumed for the substitute assets.
Scope applied country- and asset-type-specific servicing fees which the cover pool needs to pay. For the residential mortgage loans, Scope assumed a servicing fee of 25bps and 10bps for the substitute assets (mainly Norwegian mortgage-covered bonds).
The cover pool’s net present value in the event of an asset sale was calculated by adding a 150bps refinancing premium to the rating-distance and scenario-dependent discount curve. The same premium was applied to substitute assets. Scope derived this liquidity premium by analysing the long-term development of trading spreads for Norwegian and other ‘core country’ covered bond spreads.
The programme is most sensitive to high prepayments, which create a large amount of cash and reduce the transaction’s excess spread. For the mortgage assets, Scope also tested the programme’s sensitivity to compressed asset margins (down by 50%), a 200bps liquidity premium and front-loaded defaults to reinforce the programme’s break-even overcollateralisation.
Market risk accounts for 2pp of the 4.0% rating-supporting overcollateralisation. Market risks relate to both interest-rate and asset-liability mismatches.
No stress testing was performed
Cash flow analysis
The Credit Rating uplift is based on a cash flow analysis using Scope Ratings’ covered bond model (Covered Bonds Expected Loss Model version 1.0). The model applies Credit Rating distance-dependent stresses to scheduled cash flows to simulate the impact of increasing credit and market risks. The model outcome is the expected loss for a given level of overcollateralisation.
The methodologies used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 18 May 2021; General Structured Finance Rating Methodology, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating and Outlook are (Covered Bonds Expected Loss Model version 1.0, Portfolio Model version 1.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.
The Credit Rating and Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook is UK-endorsed.
Lead analyst: Mathias Pleißner, Director
Person responsible for approval of the Credit Rating: Olivier Toutain, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 19 December 2018. The Credit Rating/Outlook was last updated on 28 May 2021.
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Conditions of use / exclusion of liability
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