Rating action

Scope Ratings GmbH (Scope) has today affirmed the AAA/Stable rating 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.

Rating rationale

Solid issuer quality (positive)¹. SSBB’s A-/Stable issuer rating is aligned with that of its parent. SSBB would likely benefit from full support from its parent in case of need. Sandes has a well-established franchise in south-western Norway, a resilient earnings capacity and solid prudential metrics.

Governance support provides a five-notch uplift above the issuer rating. This effectively forms a rating floor at AA+. Cover pool support enables the programme to be rated AAA, with another one notch of uplift.

Governance support (positive)². Governance support factors i) Norway’s covered bond legal framework; and ii) the resolution regime and systemic importance of SSB’s covered bonds (ESG factor).

Cover pool support (positive)³. Cover pool support reflects the credit strength of the covered bond programme and adds one notch of uplift. It factors the following rating considerations:

1. Cover pool complexity category (positive). Scope has assessed the cover pool complexity as low. This category reflects the issuer’s management of the interplay between the programmes complexity and the transparency provided to investors. This allows for a maximum uplift of three notches on top of the governance uplift. (ESG factor)
    
2. Overcollateralisation (positive). As of 31 December 2022, available overcollateralisation was 22.5%. This level provides protection against market and credit risks and is well above the 6% minimum that supports the cover pool uplift.
    
3. 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 51.1% and high granularity, with the top 10 exposures accounting for 0.9% only.
    
4. Market risks (negative). There is no foreign currency or interest rate risk. All bonds are denominated in local currency (NOK). Fixed-rate covered bonds are effectively hedged into floating with four different counterparties. This matches the profile of the cover assets. However, the programme is exposed to maturity mismatches.

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 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 of the credit quality of the issuer; ii) a deterioration in governance support factors relevant to the issuer and Norwegian mortgage-covered bonds in general as well as in the interplay between complexity and transparency; and/or iii) an inability of the cover pool to provide an 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% with a coefficient of variation of 60%.

Scope assumed asset-recovery rates ranging between 98% in the base scenario and 73% 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 rural areas of Norway. The stressed security value haircuts for the properties securing the mortgage loans range between 55% and 65% (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 up to 22% was assumed. Conservatively, Scope derived its default expectation based on the issuer’s credit view of all exposures. The low default rate of 0.1% 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 60% in the most stressed scenario.

Overall, credit risk accounts for 3 pp of the 6% rating-supporting overcollateralisation, 1 pp above that of the previous review, reflecting lower stressed recovery rates.

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. 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 also assumed for the substitute assets.

Scope applied country- and asset-type-specific servicing fees that the cover pool needs to pay. For the residential mortgage loans, Scope assumed a servicing fee of 25 bp and 10 bp for the substitute assets.

The cover pool’s net present value in the event of an asset sale was calculated by adding a 150 bp refinancing premium to the rating-distance and scenario-dependent discount curve. The same premium was applied to substitute assets (predominantly Norwegian mortgage-covered bonds). 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 low prepayments in a low interest rate scenario. In combination with high maturity mismatches, high amounts of assets are to be sold under discount to meet the covered bond’s extended maturity. Scope also tested the programme’s sensitivity to higher liquidity premia to reinforce the programme’s break-even overcollateralisation.

Market risk accounts for 3 pp of the 6% rating-supporting overcollateralisation, also 1 pp above that of the previous review, reflecting lower margins provided by the cover pool. Market risks relate to both interest-rate and asset-liability mismatches.
 
Rating driver references
1. SSBB’s issuer rating
2. Governance support assessment Norway
3. SSBB’s public reporting

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 (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.

Methodology
The methodology used for this Credit Rating and Outlook, (Covered Bond Rating Methodology, 25 April 2022), is 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 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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.

Regulatory disclosures
The Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed.
Lead analyst: Reber Acar, Associate Director
Person responsible for approval of the Credit Rating: Nicolas Hardy, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 19 December 2018. The Credit Rating/Outlook was last updated on 21 April 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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