Rating action

Scope Ratings GmbH (Scope) has assigned a first-time AAA rating on the NOK 50bn Norwegian covered bond (obligasjoner med fortrinnsrett; ISIN NO0013056184) issued by specialised mortgage institution DNB Boligkreditt (DNBB). DNBB is fully owned by DNB Bank ASA. The Outlook on the issue rating is Stable.

The covered bond was issued out of DNBB’s existing covered bond programme that is collateralised with a NOK 674bn (as of 30 September 2023) cover pool. The new bond ranks pari-passu with other outstanding covered bonds issued out of the programme.

Rating rationale

Solid issuer rating (positive)¹. Scope’s view on DNBB’s credit quality reflects the mortgage bank’s strong integration into the DNB group, the leading financial services franchise in Norway.

DNB holds a dominant market position and a diversified business franchise in its home market of Norway, which underpin its resilient ability to generate earnings. The group’s leading retail and commercial banking franchise is complemented by leading positions in asset management, insurance and investment banking.

Scope has a subscription rating on DNB Bank ASA. To view the rating and rating report on ScopeOne, Scope’s digital marketplace, or to register, please click here.

Governance support (positive)². Governance support is the primary rating driver, providing the covered bond with six notches of uplift above the issuer rating, of which only two are needed to raise the covered bond rating to the highest achievable level. Governance support factors are based on Scope’s view on: i) Norway’s covered bond legal framework; and ii) the resolution regime and systemic importance of DNBB and its covered bonds in the country (ESG factor).

The legal framework, together with common market practices, ensures i) the cover pool is segregated from the parent’s insolvency estate; ii) bond payments can continue after insolvency; and iii) identified risks can be mitigated by overcollateralisation, which generally remains available after insolvency. Norwegian covered bonds also benefit from specific regulatory oversight as well as liquidity and other risk management guidelines allowing for two notches of uplift from our legal framework assessment.

The additional four notches of resolution-regime uplift reflects Scope’s assessment of the Norwegian resolution regime and systemic importance considerations. These include: i) the implementation of the Bank Recovery and Resolution Directive and the exemption of covered bonds from bail-in; ii) incentives that prevent regulatory intervention in the issuer affecting the covered bonds’ credit quality and performance; iii) product-, issuer- and country-specific aspects relevant to the systemic importance of covered bonds in Norway; and iv) Norway’s pro-active stakeholder community.

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

Rating-change drivers

Scope’s Stable Outlook on the covered bond reflects a rating buffer of five notches, including one potential notch from the cover pool. The rating may be downgraded upon: i) an issuer rating downgrade by more than five notches; ii) a deterioration in Scope’s view on governance support factors relevant to the issuer and Norwegian covered bonds in general; or iii) an inability of the cover pool to provide an uplift if the issuer rating is downgraded by more than four notches.

Quantitative analysis and assumptions

Cover pool support (positive)³. The cover pool provides additional rating stability. This is reflected in:

1. Cover pool complexity category (positive). Scope has assigned the interplay between complexity and transparency a cover pool complexity (CPC) category of ‘high‘, allowing for up to one notch of uplift on top of the governance support uplift. The assessment is constrained by the limited public visibility on origination standards and issuance strategy as well as on hedging and counterparty risk mitigation (ESG factor).
    
2. Solid overcollateralisation (positive). The 79.4% of overcollateralisation as of 30 September 2023 can shield the current AAA rating against an issuer downgrade of up to five notches.
    
3. Sound credit quality (positive). The cover pool comprises well-diversified domestic residential mortgage loans. The cover assets benefit from a low average indexed loan-to-value ratio of 51.7% and high granularity, with the top 10 exposures accounting for only 0.2%.
    
4. Maturity mismatch (negative). Market risks are moderate, reflecting the issuer’s foreign currency and interest rate hedging. All bonds are denominated or swapped into local currency (NOK) and a floating rate, thereby matching the rate on most of the cover assets. However, the loans’ weighted average maturity is around 10 years longer than that on the covered bond, exposing the programme to potential discounted asset sales in a stressed environment. The bond’s soft-bullet maturity combined with available overcollateralisation reduces this risk.

Scope performed a cover pool analysis to assess the cover pool’s ability to provide additional support should the issuer be downgraded by more than four notches.

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 10.0% together with a coefficient of variation of 55.0%.

Scope assumed asset-recovery rates ranging between 95.0% in the base scenario and 72.5% 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. Scope also assumed a 20% fire-sale discount on properties sold under non-standard or distressed conditions as well as a 10% haircut for repossession costs. The total stressed security value haircuts for the properties securing the mortgage loans range between 52.5% and 57.5%, depending on the location of the property.

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 a recovery lag of 24 months for residential mortgage loans. This is based on an analysis of Norwegian enforcement processes.

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 25 bp.

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. 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 interest rate scenarios in combination with low prepayments. Given the high maturity mismatch, a significant amount of assets would need to be sold at a discount to cover payment obligations over a longer maturity.

Rating driver references
1. DNBB issuer credit view (Confidential)
2. Governance support assessment Norway
3. DNBB public quarterly 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 1.1). 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, 24 May 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and Outlook is (Covered Bonds Expected Loss Model Version 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 did not participate in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain 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: Mathias Pleißner, Senior Director
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 8 November 2023. 

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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