Fitch cut to RD Capital Centre T ‘fully anticipated’

Fitch cut Capital Centre T covered bonds issued by Realkredit Danmark from AAA to AA+ on Tuesday, with an official at the issuer noting that the rating action was fully anticipated in light of rating methodology changes, and that it expects to eventually be able to regain a triple-A rating.

Fitch put the covered bonds on Rating Watch Negative in September after rolling out updated rating criteria, under which it assigned the programme a Discontinuity Cap (D-Cap) of 2. Combined with an issuer default rating of A and maximum recovery uplift of two notches, this limits the maximum achievable covered bond rating to AA+.

For all programmes that under its revised criteria no longer had their prevailing rating supported, Fitch gave issuers time to respond to the updated assessment and propose changes.

Klaus Kristiansen, executive vice president at Realkredit Danmark, told The Covered Bond Report that the rating action was fully anticipated when the issuer obtained the rating from Fitch in June given the rating agency’s plans for amending its rating criteria.

Besides an upgrade of the issuer rating, the main way for the Capital Centre T covered bonds to be rated triple-A would be for a more favourable D-Cap to be assigned, said Kristiansen, with this hinging on Fitch’s assessment of refinancing risk in the programme.

“It’s not a question of overcollateralisation or credit risk,” he said, “but the refinancing risk.”

“We would need to issue longer term bonds, but this is not an immediate option for us given the pass through business model of Danish mortgage banks, although it is a project that we have embarked on by encouraging customers to take out longer term mortgages.”

In the long run, depending on the success of these efforts, added Kristiansen, Realkredit Danmark would expect its Capital Centre T covered bonds to be able to regain a triple-A rating from Fitch, all else being equal.

Fitch said that the D-Cap of 2 is driven by the high risk assessment of the liquidity gap and systemic risk, which is the weakest of the D-Cap component assessments.

“The cover pool of capital centre T consists of only adjustable rate mortgage loans, which are funded by the issuance of short term mortgage covered bonds,” it said. “These mostly need to be rolled over on an annual basis and are consequently fully exposed to refinancing risk, even while the issuer is solvent.”

Realkredit Danmark said that Fitch’s updated rating criteria will not affect Capital Centre S, which it uses for the funding of fixed rate loans and capped floating rate loans.

“Bonds issued for the funding of these loans will thus have the highest attainable rating of AAA,” it said.