Realkredit Danmark ‘T’ bonds on RWN as Fitch starts D-Caps

Fitch put its AAA rating of Realkredit Danmark capital centre T issuance on Rating Watch Negative on Tuesday as it began implementing updated covered bond rating criteria, under which it has assigned Discontinuity Caps and outlooks to programmes from Denmark and Norway.

The rating agency on Monday announced the update to its covered bond rating criteria, incorporating changes trailed in an exposure draft in May.

Under Fitch’s updated criteria, D-Caps determine the maximum rating notch uplift from an issuer’s long term default rating to the covered bond rating on a probability of default (PD) basis. The D-Cap scale stretches from 0 for “full discontinuity risk” to 8 for “minimal discontinuity” and for cases apart from a D-Cap of 8 the score is based on the highest risk assessment of any one of four components: asset segregation, liquidity gap and systemic risk, alternative management (systemic and cover pool-specific) and privileged derivatives.

Fitch placed Realkredit Danmark’s capital centre T rating on RWN because a Discontinuity Cap (D-Cap) of 2 (high risk) caps the maximum achievable rating for the programme at AA+.

The rating agency said that the driver of the D-Cap of 2 is the high risk assessment of the liquidity gap and systemic risk component of the D-Cap, in turn resulting from the liquidity risk posed by the refinancing of the adjustable rate mortgages (ARM) loans, which make up 100% of the capital centre T.

“Realkredit’s significant mortgage covered bonds refinancing needs could prove challenging if it entered into insolvency,” said Fitch, “even if the Danish law allows for an administrator to issue refinancing bonds.”

Fitch only assigned a rating to Realkredit Danmark’s issuance for the first time in June, after the mortgage lender had terminated its relationship with Moody’s a year earlier following a disagreement over the way the refinancing risk of adjustable rate mortgage loans was considered. However, upon assigning its initial rating Fitch had flagged the possibility of the capital centre T issuance being downgraded should it implement its criteria changes as proposed.

Issuers facing RWNs have a month from the publication of the respective country/regional commentary to give feedback to Fitch on any planned changes to their programmes and, if these are likely to impact the rating, the rating agency will consider these. If no plans are proposed, the covered bonds will be downgraded.

Realkredit Danmark parent Danske Bank had its covered bonds put on negative outlook.

“The Negative Outlooks on Danske Bank’s covered bond programmes issued out of cover pools D, I and C reflect that the outlook on the bank’s long term Issuer Default Ratings (IDRs) is negative and a one notch downgrade of the IDRs would make the covered bonds vulnerable to downgrade,” said the rating agency.

It also applied the updated rating criteria to Norwegian programmes, although no other rating actions resulted from the update for banks in Norway or elsewhere in Denmark.