OREANDA-NEWS. Fitch Ratings has affirmed Sparebank 1 Boligkreditt's (S1B; A-/Stable/F2) NOK147.5bn mortgage covered bonds at 'AAA' with a Stable Outlook. The affirmation follows an annual review of the programme.

KEY RATING DRIVERS
The rating is based on S1B's Long-term Issuer Default Rating (IDR) of 'A-', an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the 11.3% overcollateralisation (OC) that Fitch takes into account in its analysis, which provides more protection than the 8% 'AAA' breakeven OC for the programme. The Stable Outlook on the covered bonds rating reflects that on S1B's IDR.

The 8% 'AAA' breakeven OC is unchanged from last year. It is mainly driven by the credit loss (4.4%) and the refinancing and reinvestment costs (8.2%). The excess spread in the programme leads to a lower breakeven OC of 4.2%. The 'AAA' breakeven OC includes an adjustment for commingling risk because the collection account bank (Sparebank 1 SR-Bank, A-/F2) is rated below Fitch's 'A'/'F1' rating threshold for 'AAA' rated covered bonds.

The unchanged D-Cap of 4 is due to the weak link assessment of moderate risk of the liquidity gap & systemic risk, systemic alternative management and privileged derivatives components. All the other components have an unchanged risk assessment of very low for asset segregation and of low for cover pool specific alternative management. Fitch has revised the privileged derivatives assessment to moderate from low to reflect that it no longer rates one of the currency swap counterparties, DNB, and replacement provisions are therefore not in line with Fitch's criteria. However, the exposure to DNB is mitigated by collateral.

As of end-March 2015, the pool consisted of 95.0% residential mortgages and 5.0% substitute assets in the form of liquid securities and cash. Fitch does not give full credit to the cash accumulated for the benefit of the programme because some of it is held with a counterparty (Sparebank 1 SR-Bank) rated below 'A'/'F1'. The OC level of 11.3% upon which the agency relies excludes such intra-group exposures and represents the lowest observed eligible OC over the past 12 months.

The 'AAA' expected loss on the assets has increased slightly due to higher market value decline assumptions in Fitch's criteria. All mortgages in S1B's cover pool have a variable rate and are secured by mostly owner-occupied Norwegian residential properties. The pool characteristics have remained broadly unchanged since the last programme review.

The bonds have been issued in NOK, EUR, USD and SEK at fixed and variable rate, while all mortgages in the pool pay a floating rate. Asset and covered bond swaps are in place with external counterparties to hedge the currency and interest rate mismatches in the programme.

DNB is no longer rated by Fitch but the agency takes comfort from the fact that it is 34%-owned by the Norwegian government and that it is posting collateral under the swaps.

RATING SENSITIVITIES
The 'AAA' rating for the programme would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one notch or more to 'A-' or lower; (ii) the D-Cap falls by one category or more; or (iii) the OC Fitch gives credit to in its analysis drops below Fitch's 'AAA' breakeven level of 8.0%. If the OC were to fall to the legal minimum level of 0%, the covered bonds would be rated 'A+' based on the issuer's IDR of 'A-' and 2-notch recovery uplift.

The Fitch breakeven OC for the covered bond rating will be affected, amongst 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.