OREANDA-NEWS. Fitch Ratings has affirmed Sandnes Sparebank Boligkreditt's (SSBB) NOK5.9bn mortgage covered bonds at 'AA' with a Stable Outlook.

KEY RATING DRIVERS

The covered bonds' rating is based on Sandnes Sparebank's reference Long-Term Issuer Default Rating (IDR) of 'BBB', an unchanged Discontinuity Cap (D-Cap) of '4' (moderate risk), and the issuer's commitment of 11% nominal overcollateralisation (OC), which is above the 10% 'AA' breakeven OC. The Stable Outlook on the covered bonds' rating reflects that of Sandnes Sparebank's reference IDR.

The programme is not eligible for an IDR uplift since banking resolution legislation is still under development in Norway. The weakest link of the D-Cap remains the liquidity gap and systemic risk, and systemic alternative management. The liquidity risk is mitigated by the 12 month extendible maturity on the covered bonds and by liquid assets in the form of cash and highly rated securities (4.5% of the pool).

The 10% 'AA' breakeven OC is mainly driven by the credit loss component of 7.7% and the asset disposal loss component of 10.0%. The cash flow valuation component stands at -5.6%. The credit loss component represents the impact on the breakeven OC from the 16.51% weighted average (WA) default rate and the 56.71% WA recovery rate for the mortgage cover assets in a 'AA' scenario. The cover pool is characterised by high concentration in the county of Rogaland (89% of the residential loans), which Fitch has factored in by increasing the expected losses assumed on the assets compared with its base stresses.

DNB acts as one of the swap counterparties for the programme. DNB is no longer rated by Fitch but the agency analysed the materiality of the exposure and the mitigants in place. The materiality of the swap with DNB is small as the notional of the swaps with DNB represent 4.2% of the bonds. Also, DNB is 34%-owned by the Norwegian government (AAA/Stable). Fitch will monitor the programme's exposure to DNB over time. If this exposure becomes material, it could have an impact on the programme's rating.

RATING SENSITIVITIES

The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches to 'BBB-' or below; or (ii) the number of notches represented by the D-Cap is reduced to three or lower; or (iii) the OC that Fitch considers in its analysis decreases below Fitch's 'AA' breakeven level of 10%.

The Fitch breakeven OC for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time.