Rating action

Scope Ratings GmbH (Scope) has today assigned a rating of AAA with a Stable outlook to the announced digital bond with ISIN DE000A383BJ9 of Germany’s development bank Kreditanstalt für Wiederaufbau (KfW), rated (AAA/Stable). The issuance of the unlisted, senior unsecured notes, with an announced minimum size of EUR 100m and a tenor of 1.5 years, is expected in late June or early July 2024 and marks the first issuance of a blockchain-based digital bond for KfW.

Rating rationale

The AAA rating assigned to the digital bond reflects the guarantee framework supporting KfW’s issuer rating which is equalised with the sovereign credit rating of the Federal Republic of Germany (AAA/Stable). The Federal Republic of Germany guarantees current and future obligations of KfW on an explicit, unconditional, unlimited, statutory, direct and irrevocable basis, thus providing creditors with direct recourse in case the bank cannot meet its obligations on a timely basis. In addition, KfW benefits from a maintenance obligation by the Federal Republic under the principle of Anstaltslast. Chartered under public law, the bank cannot be subject to insolvency proceedings.

Scope considers the credit risk of the new blockchain-based notes to be in line with that of KfW’s conventional bonds. According to the draft terms and conditions, the obligations will rank pari passu among themselves and with all other unsecured and unsubordinated obligations of KfW.

The notes will mark the second issuance of a digital bond by KfW under the German Electronic Securities Act (eWpG) and its first use of distributed ledger technology to issue and transfer securities.

KfW has taken steps to address operational, legal and cyber risks specifically related to the issuance via distributed ledger technology. This includes an independent audit of the associated smart contract which limits transactions to pre-approved, whitelisted blockchain addresses. On the issue date, upon receipt of the purchase price, Cashlink Technologies GmbH as the registrar of the transaction issues the bond token to the lead arranger's wallet (Deutsche Bank AG) through the Polygon Blockchain. Following the issuance, the notes will be transferred to DZ Bank AG as the Collective Registered Holder, who holds the tokens for the full term. Any further transactions with investors are recorded in the books of DZ Bank as traditional book-entry records. All interest and redemption payments will be conducted outside the blockchain through traditional channels and in Euro.

KfW is the largest German government development agency and one of the largest SSA issuers in Europe. Following previous blockchain bond issuances by the European Investment Bank and the World Bank, KfW will be one of the pioneering development banks to use the technology to issue debt. While only the initial issuance will be blockchain-based and all other functions performed through traditional channels, this initial transaction will allow the bank to test the infrastructure, paving the way for further developments.

Rating-change drivers

The ratings/Outlooks of KfW could be downgraded if: i) the Federal Republic of Germany’s ratings/Outlooks were downgraded; and/or ii) material changes occurred to the credit support by the Federal Republic of Germany, notably the explicit guarantee, public law status, Anstaltslast and exemptions from insolvency law and taxation.

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodologies used for this Credit Rating and Outlook, (Government Related Entities Rating Methodology, 13 July 2023; Financial Institutions Rating Methodology, 6 February 2024), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The methodology Financial Institutions Rating Methodology, 6 February 2024, was used in part only, namely section 1 (Rating Framework).
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 and the Rated Entity.
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 and Outlook were 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: Eiko Sievert, Director
Person responsible for approval of the Credit Rating: Alvise Lennkh-Yunus, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 21 June 2024. 

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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