Rating action

Scope Ratings GmbH (Scope) has today affirmed the AAA rating with a Stable Outlook on the Norwegian covered bonds (obligasjoner med fortrinnsrett) issued by Landkreditt Boligkreditt AS (Landkreditt), the fully owned mortgage subsidiary of Landkreditt Bank AS (both banks rated A-/Stable).

Key rating drivers

Solid issuer rating (positive)¹. Landkreditt’s solid issuer rating (A-/Stable) is aligned with the issuer rating of its ultimate parent, Landkreditt Bank AS, the leading provider of financial services to Norway’s agricultural sector.

Cover pool support (positive)^2,3. Cover pool support is the primary rating driver and adds at least six notches of rating uplift. This is reflected by:

1. Cover Pool Complexity Score (positive). Scope has assigned a Cover Pool Complexity category of ‘low’. This reflects the issuer’s management of the interplay between complexity and the transparency provided to investors and allows for a maximum uplift of three notches on top of the governance uplift. (ESG factor)
    
2. Over-collateralisation (positive). As of 30 September 2022, available over-collateralisation was 16.9%. This level provides protection against market and credit risks and is well above the unchanged 5.0% minimum that supports the cover pool uplift.
    
3. Sound credit quality (positive). The cover pool comprises domestic residential mortgage loans. The cover assets benefit from a low average loan-to-value ratio of 40.8% and moderate granularity, with the top 10 exposures accounting for 2.5%.
    
4. Market risks (negative). There is no foreign currency or interest rate risk. All bonds are denominated in local currency (NOK) and issued floating rate – matching the profile of the cover assets. However, the programme is exposed to maturity mismatches given that the weighted average life of the loans (disregarding prepayments) is 12.6 years longer than that of the covered bonds. This exposes the programme to potential asset sales under discounts in a stressed environment. The bonds’ soft-bullet maturity profile and available over-collateralisation reduce risks.

Governance support (positive)³. Governance support provides the covered bonds with five notches of uplift above the issuer rating. As such, only one additional notch from the cover pool support is needed to raise the covered bonds’ ratings to the highest achievable level. (ESG factor)

One or more key drivers of the credit rating action are considered an ESG factor.

Rating-change drivers

Scope’s Stable Outlook on the mortgage covered bonds reflects a rating buffer of two notches of potential cover pool support. The ratings may be downgraded upon: i) an issuer rating downgrade by more than two notches; ii) a deterioration in Scope’s view on governance 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 8.8% together with a coefficient of variation of 50%.

Scope assumed asset-recovery rates ranging between 99.9% in the base scenario and 84.8% 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 and base case considered 5%, reflecting the value discount of properties sold under non-standard or distressed conditions. The total stressed security value haircuts for the properties securing the mortgage loans range between 55% and 67.5% (depending on the location of the property). On top of that, Scope applied 2.5% of variable and NOK 70,000 of fixed liquidation costs.

Overall, credit risk accounts for 2.0pp of the 5.0% rating-supporting overcollateralisation, 1.0pp above that of the previous review. Higher credit risk is driven by continuing above average market value increases in Norway and our more conservative view on Norwegian mortgage loans.

Scope used the resulting loss distributions and default timings to project the covered bond programme’s losses and reflect its amortisation structures. 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 an annual average servicing fee of 25 bps for mortgage loans and a recovery lag of 18 months. The recovery timing for the mortgage loans was based on an analysis of Norwegian enforcement processes, also considering the collateral’s regionality.

The agency calculated the cover pool’s net present value in the event of an asset sale by adding refinancing premiums to the rating-distance and scenario-dependent discount curve. The premium was 150 bps.

The program is most sensitive to low interest rate scenarios in combination with low prepayments. For the mortgage assets, the agency also tested the programme’s sensitivity to long-term average and compressed asset margins (down by 50%), a 200 bps liquidity premium and front-loaded defaults to reinforce the programme’s break-even overcollateralisation.

Market risk accounts for 3.0pp of the 5.0% rating-supporting overcollateralisation, down from 4.0pp in the previous analysis. Scope conservatively established the asset’s amortisation profile assuming that all flexible lines were fully drawn. The bond’s amortisation profile was calculated assuming the one-year maturity extensions was executed.

Rating driver references

1. Landkreditt Boligkreditt AS – public issuer rating
2. Landkreditt Boligkreditt public quarterly reporting
3.  Confidential cover pool reporting: Confidential

Stress testing
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 (CobEL 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.

Methodology
The methodologies used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 25 April 2022; General Structured Finance Rating Methodology, 17 December 2021), are available on https://www.scoperatings.com/#!methodology/list. The model used for this Credit Rating and Outlook is (Covered Bonds Expected Loss Model version 1.0) available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list. 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 Rating if the Credit Rating 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 internal sources. Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The 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 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.

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: Mathias Pleißner, Senior Director
Person responsible for approval of the rating: Nicolas Hardy, Executive Director
The ratings/outlooks were first released by Scope on 4 April 2018. The ratings/outlooks were last updated on 25 January 2022.

Potential conflicts
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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