Rating action

Scope Ratings GmbH (Scope) has affirmed the AAA rating on the Norwegian mortgage covered bonds (obligasjoner med fortrinnsrett) issued by LKBol. The Outlook is Stable.

Key rating drivers

Covered bond rating anchor: A-. The issuer rating is the starting point of the covered bond rating. It reflects that Landkreditt Boligkreditt (LKBol), a wholly owned subsidiary, is fully aligned with that of Landkreditt Bank. Through the issuance of covered bonds, LKBol provides secured funding for its parent. Scope expects it to benefit from full support from its parent in case of need (see detailed rating report here).

Governance support (plus up to five notches). This rating uplift reflects the high likelihood of covered bonds being maintained as a going concern funding instrument in the event of regulatory action in the issuer or its parent as well as a smooth transition from the first (issuer) to the second recourse (cover pool) if needed. It consists of three notches from our resolution regime and systemic importance assessment and two notches from Scope’s legal framework and structural support assessment.

Scope’s legal framework and structural support analysis for LKBol’s covered bonds considers: 1) the cover pool’s valid segregation from the insolvency estate of the issuer in case of an insolvency; 2) the very high likelihood of bond payments continuing after insolvency; 3) the strong legal and programme specific asset eligibility and risk management principles; 4) that enhancements to the covered bond programme remain available after an insolvency of the issuer; and 5) the strong regulatory oversight specifically for Norwegian covered bonds (ESG factor).

The resolution regime and systemic importance assessment considers: 1) the existence of statutory provisions (Bank Recovery and Resolution Directive) that protect the covered bonds against regulatory actions; 2) the strength of statutory provisions including their exemption from being bailed-in; 3) high systemic importance of Norwegian covered bonds but the low to moderate systemic importance of LKBol as a covered bond issuer; and 4) Norway’s strong proactive stakeholder community (ESG factor).

Cover pool support (plus up to three notches). This rating uplift reflects the impact of the second recourse, with Scope’s cover pool complexity (CPC) risk assessment of ‘Low’ allowing for up to three notches of cover pool support (ESG factor).
An overcollateralisation (OC) of 5.0% (legal minimum) is needed to support the current AAA rating. The current OC is 19.7%. The rating-supporting OC reflects:

• Credit risk – granular seasoned and domestic mortgages. The covered bonds are covered by a mortgage cover pool comprising granular, well-seasoned, domestic, residential, mostly owner-occupied cover assets with a low (unindexed) loan-to-value ratio of about 40.4%. Scope has calculated an annual default probability of 1.0% together with a coefficient of variation of 50.0%. The stressed recovery rate is 91.2%.
   
• Market risk – No FX and interest mismatches. The programme’s assets and bonds are NOK-denominated and floating rate. However, the programme is exposed to maturity mismatches as reflected by the unmatched profiles (weighted average scheduled life of the assets of 15.6 years compared to 3.0 years of the covered bonds (extended)). The covered bonds are most sensitive to low prepayment (1%) together with a decreasing interest rate environment (down to -1%).

An OC of 7.0% would shield the current rating against a one-notch issuer downgrade.

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

Outlook and rating sensitivities

The Stable Outlook on the LKBol’s covered bonds reflects Scope’s view on the expected rating stability of the issuer and no material changes to either governance or cover pool support factors.

Upside scenarios are not applicable as the ratings are the highest achievable.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

• An issuer rating/Outlook downgrade by three notches
   
• A reduction in the governance support uplift by three notches
   
• A deterioration in the programme’s interplay between complexity and transparency that worsens Scope’s CPC assessment and reduces the number of notches from cover pool support
   
• Available or committed OC falling below the rating-supporting level

Environmental, social and governance (ESG) factors

Governance is a key rating driver. For more detail, please refer to ‘governance support’ and ‘cover pool support’ (CPC assessment) under the ‘key rating drivers’ section above.

Quantitative analysis and assumptions

For its quantitative analysis Scope applied assumptions as laid down in the covered bond methodology.

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 1.2). 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/or Outlook, (Covered Bond Rating Methodology, 26 July 2024), 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 1.2), 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: the Rated Entity, 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/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating and/or Outlook was not amended before being issued.

Regulatory disclosures
The Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Fatemeh Torabi Kachousangi, Specialist
Person responsible for approval of the Credit Rating: Karlo Fuchs, Managing Director
The Credit Rating/Outlook was first released by Scope Ratings on 4 April 2018. The Credit Rating/Outlook was last updated on 6 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, 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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.