Aktia in switch from specialist to universal amid regs, ratings flux

Aktia Bank will take over from Aktia Real Estate Mortgage Bank as the Finnish group’s covered bond issuer, a move fuelled by regulatory and rating criteria changes that favour more “streamlined” universal bank issuance, the specialist issuer announced last Wednesday (12 September).

It said that following discussions throughout the year the board of Aktia Real Estate Mortgage Bank (REMB) decided that it will focus on maintaining and refinancing the current loan portfolio, and that owner banks — Aktia Bank, savings banks and POP Banks — will as a result grant mortgage loans only through their own operations.

“All owners are fully committed to make sure that Aktia REMB meets the agreed capital and liquidity targets also in the future,” said Aktia REMB. “The loan portfolio meets all guidelines and regulations set by legislation and regulators now and in the future.”

Timo Ruotsalainen, managing director, Aktia REMB, told The Covered Bond Report that the plan is for Aktia Bank to be ready to issue off a new programme by the end of Q1 next year at the latest.

“There will be a time lag between the old entity becoming inactive and the new issuer building its capabilities to operate,” he said, “but we hope this will be short.”

Covered bonds issued by Aktia REMB are rated Aa1 by Moody’s, which has had their rating on review for downgrade since November 2011. The review was initiated because Moody’s was reviewing for downgrade the ratings of Aktia Bank — the parent of Aktia REMB — which it has since then cut from A1 to A3 because of concerns surrounding the bank’s weakening profitability and reliance on market funding. Moody’s did, however, at the same time confirm the high quality of the mortgage portfolio of Aktia REMB, noted Ruotsalainen.

Aktia REMB as a bank is not publicly rated by Moody’s.

Ruotsalainen said that Aktia REMB had during the year developed some ideas for guarantee structures that it felt could avert a downgrade of its covered bonds by Moody’s, but Aktia REMB’s owner banks found it difficult to agree on all the terms of the proposed arrangements aimed at satisfying Moody’s concerns.

“Our board therefore decided that it was better to make sure that the REMB cover pool kept its value and to not issue any covered bonds,” he said, “and the owner banks will continue providing mortgage loans through their respective operations as they have done all the time, but without Aktia REMB services.”

He said that the owner banks are committed to supporting the capitalisation and liquidity of Aktia REMB and that the quality of the existing cover pool will be maintained at a level that would enable the issuer to access the market in future again.

“It’s not the first option,” he said, “but we want to keep the existing entity in shape so as to be able to issue if necessary.

“We want to keep our options open.”

The move to universal bank issuance was made possible as a result of amendments to Finland’s covered bond legislation in August 2010, which previously required a specialist mortgage bank to be set up for issuance. The change has encouraged smaller institutions such as Ålandsbanken to set up covered bond programmes.

A covered bond analyst said that Aktia’s move was understandable.

“The pressure of rating agencies as well as of regulators on companies with a very monopolistic funding structure has indeed increased strongly in the past,” he said, “and the effort required to maintain good ratings (e.g. by way of liquidity lines) have become increasingly complicated.

“Since the new legal framework allows for covered bond issuance out of universal credit institutions, the move away from Aktia REMB back to the group members is a reasonable consequence.”

However, he cautioned against underestimating new sources of complexity entailed by issuance out of a universal bank, such as structural subordination of depositors, increased asset encumbrance concerns, and management of set-off risk.