Eiendomskreditt rating fuels commercial tightening, ambition

Jul 17th, 2014

Commercial mortgage backed covered bonds issued by Eiendomskreditt AS tightened some 15bp after being assigned a first, S&P rating, and the Norwegian issuer’s CFO told The Covered Bond Report that it has ambitions to grow considerably in the coming years.Eiendomskreditt

Eiendomskreditt was founded in 1997 but after the introduction of covered bond legislation in Norway was converted into a covered bond company. It has commercial and residential cover pools and has issued covered bonds out of each into the domestic Norwegian krone market, and is wholly wholesale funded. Its shareholders are 85 Norwegian savings banks.

It received a AA rating for its commercial mortgage covered bonds on 1 July, on the back of a new BBB issuer rating.

According to a dealer in Oslo, Eiendomskreditt five year commercial covered bonds tightened some 15bp in the wake of the rating being assigned, to trade at around 47bp over three month Nibor. He added that this is some 20bp-22bp wider than where triple-A rated DNB covered bonds trade.

Lars Lynngård, Eiendomskreditt CFO, said that the rating will help the issuer grow.

“We have the ambition to establish ourselves in the Norwegian market as one of three issuers of covered bonds backed by commercial mortgages — alongside SpareBank 1 and DNB — where we can be a financing instrument for primarily the savings banks among our 85 shareholders that are not already part of an alliance,” he told The CBR.

“The fact that we have taken on this rating reflects our ambitions to grow quite considerably in the years ahead. It will cut our cost of funds and regulations are moving in a direction where rated bonds enjoy more favourable treatment.”

Assigning the issuer’s BBB rating, S&P noted that commercial real estate loans account for 69% of Eiendomskreditt’s lending. The rating agency also highlighted that Eiendomskreditt has a loan-to-value limit of 55% for commercial mortgages, reflecting a “conservative” underwriting process and general approach to risk by the issuer’s management.

“Eiendomskreditt will continue to increase its share of commercial real estate as it increases its role as a commercial real estate mortgage financier for its owner banks,” said S&P, although for now it considers the issuer’s business position to be “weak” under its methodology, citing total assets of around Nkr5bn (Eu600m) at the end of the first quarter of 2014 and “very low” market shares in residential and commercial real estate.

The covered bond programme has been deemed to have “low” asset-liability mismatch (ALMM) risk under the rating agency’s criteria and to be in Category 2, meaning that it can achieve up to six notches of uplift from Eiendomskreditt’s issuer rating.

The AA covered bond rating is on negative outlook, reflecting the outlook on the issuer rating, which is based on S&P’s view that increasing economic risks and a potentially deteriorating environment in Norway could have negative repercussions for Eiendomskreditt.

Lynngård said Eiendomskreditt has no immediate plans to issue covered bonds in euros.

“This will perhaps be an option some years ahead when we hopefully have a larger balance sheet than today,” he added.

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