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Fitch Affirms Danske Bank AS Mortgage Cover Pool C Covered Bonds at 'AAA'
May 26, 2017 / 4:31 PM / 6 months ago

Fitch Affirms Danske Bank AS Mortgage Cover Pool C Covered Bonds at 'AAA'

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has affirmed Danske Bank AS's (Danske, A/Stable/F1) mortgage covered bonds secured by the bank's cover pool C at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The covered bonds' rating is based on Danske's Long-Term Issuer Default Rating (IDR) of 'A' and unchanged uplifts as follows: IDR uplift of two notches; payment continuity uplift (PCU) of five notches and recovery uplift of one notch. Also, the 25.9% over-collateralisation (OC) that Fitch gives credit to and which is the lowest nominal OC of the last 12 months, provides more protection than the revised 17.0% 'AAA' breakeven OC for the programme. The latter supports a 'AA+' tested rating on a probability of default basis and a one-notch recovery uplift to 'AAA'. The Stable Outlook on the covered bonds' rating reflects that on Danske and a three-notch buffer against an issuer downgrade, due to the different uplift factors above the bank's IDR. The reduction in Fitch 'AAA' breakeven OC for this programme, to 17.0% from 23.5%, is driven by a lower credit loss component, of 15.1% in the 'AA+' stress scenario tested for timely payment. This is mainly driven by the diminished industry correlation that Fitch now applied in its asset model to reflect that most borrowers included in the cover pool are individuals whose total income is only partially derived from the rented properties backing the loans. In assessing the cover pool's probability of default, Fitch has assumed a three-year longer maturity for the interest-only loans (26.1%) As at 31 March 2017, Danske's cover pool C consisted of 70.8% Swedish and 29.2% Norwegian commercial real estate mortgages compared with 68.4% and 31.6%, respectively, in March 2016. Fitch calculated a 'AAA' weighted average (WA) default rate and 'AAA' WA recovery rate of 27.0% and 37.8%, respectively. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 0.6% due to positive excess spread on the underlying assets versus the covered bonds in Fitch's worst case high prepayment scenario. The asset disposal loss increases the breakeven OC by 0.8%, reflecting low maturity mismatches. The weighted average life (WAL) of the assets modelled by Fitch is 3.6 years while the WAL of the covered bonds is 2.7 years. The programme's two-notch IDR uplift reflects that covered bonds in Denmark are exempt from bail-in, Fitch's assessment that the risk of under-collateralisation at the point of resolution is sufficiently low, and that a resolution of Danske, should it happen, would not result in the direct enforcement of the recourse against the cover pool. Fitch's PCU for Danske's C programme is five notches, rather than the standard six for mortgage covered bonds with a 12-month principal maturity extension and three-month protection for interest payment. This is due to the lack of formal provisions to find a refinancing solution without delay in the event of a maturity extension. The recovery uplift for this programme is capped at one notch due to the presence of significant pre-swap FX mismatches between cover assets and liabilities. The FX covered bonds are fully hedged until maturity (including the extension period). However, upon a covered bonds' default, recoveries from SEK- and NOK-denominated assets, which have a longer WAL than the covered bonds, could expose holders of non SEK- and non NOK-denominated bonds to FX risk. RATING SENSITIVITIES The 'AAA' rating of Danske Bank AS's cover pool C mortgage covered bonds would be vulnerable to a downgrade if any of the following occurs: (i) Danske's Long-Term Issuer Default Rating (IDR) was downgraded by four notches to 'BBB-' or below; or (ii) the payment continuity uplift was reduced to one notch or less; or (iii) the level of overcollateralisation (OC) Fitch gives credit to in its analysis fell below the 'AAA' breakeven OC for the programme of 17.0%. If the actual OC was reduced to the legal minimum of 0%, the covered bonds would be downgraded to 'AA', three notches above the bank's IDR. 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. Contact: Primary Analyst Andrea Gallina Analyst +44 20 3530 1251 30 North Colonnade London E14 5GN Secondary Analyst Anne-France Chane Analyst +44 20 3530 1491 Committee Chairperson Carmen Munoz Senior Director +34 93 323 8408 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on Applicable Criteria Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Criteria for the Analysis of Commercial Real Estate Loans Securing Covered Bonds (pub. 17 Nov 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Fitch’s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance – Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here SME Balance Sheet Securitisation Rating Criteria (pub. 03 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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