Transaction Update: Swedbank Mortgage AB's Covered Bond Program

Transcription

1 Transaction Update: Swedbank Mortgage AB's Covered Bond Program Primary Credit Analyst: Casper R Andersen, London (44) ; casper.andersen@standardandpoors.com Secondary Contact: Judit O Woelk, Frankfurt (49) ; judit.papp@standardandpoors.com Table Of Contents Program Overview Major Rating Factors Outlook: Stable Rationale Program Description Issuer-Specific Factors Cover-Pool Specific Factors Additional Factors Potential Effects Of Proposed Criteria Changes Related Criteria And Research JULY 31, Standard & Poor's. All rights reserved. No reprint or dissemination without Standard & Poor s permission. See Terms of Use/Disclaimer on the last page

2 Transaction Update: Swedbank Mortgage AB's Covered Bond Program Ratings Detail Program Overview Table 1 Swedbank Mortgage Saekkerstellada Obligationer* Jurisdiction Sweden Type of covered bonds Legislation-enabled Underlying assets Residential and commercial type mortgages Outstanding covered bonds (bil. ) Year of first issuance 2007 Rating at closing/year AAA/2008 Extendible maturities No Target credit enhancement (%) Available credit enhancement (%) *Based on data as of March 31, JULY 31,

3 Major Rating Factors Strengths The assets in the cover pool are Swedish residential- and commercial-type loans with low weighted-average loan to value (LTV) ratios. The available credit enhancement significantly exceeds the target credit enhancement, which is commensurate with the maximum achievable rating on the covered bond program. The asset-liability mismatch (ALMM) risk is "low". Our rating on the covered bond program benefits from three unused notches of uplift. Weaknesses Although Swedbank Mortgage AB is committed to complying with the regulatory requirements to match assets and liabilities and may provide more overcollateralization than required by law, there is no legally binding obligation for the issuer to provide excess overcollateralization to maintain the current rating. Therefore, management could decrease the overcollateralization that currently supports the assigned rating to the regulatory minimum. This may not always be sufficient to support the current rating. The program depends on the issuer and the parent bank's liquidity support. There is currently no liquidity commitment that complies with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). We expect the cover pool to ensure that liquidity coverage is readily available for the first 180 days. This will provide sufficient time to prepare for a sale of assets. Outlook: Stable The stable outlook reflects that our rating on the covered bond program benefits from three notches of unused uplift under our ALMM criteria (see "Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads," published on April 24, 2012). Therefore, if we were to lower our rating on Swedbank Mortgage or increase the ALMM risk to "moderate" or "high" (from "low"), this would not necessarily lead to us lowering our rating on the covered bond program. We may lower our 'AAA' ratings on the covered bonds if the available credit enhancement falls below the target credit enhancement, or if the issuer takes no remedial action to mitigate counterparty risk. Rationale On June 25, 2014, we affirmed our rating on Swedbank Mortgage's covered bond program (see "Swedbank Mortgage AB Swedish Covered Bond Ratings Affirmed At 'AAA/A-1+'; Outlook Stable"). The outlook is stable. This analysis followed a regular surveillance review of the covered bond program. We have analyzed the covered bond program and Sweden's legislative covered bond framework. We consider the cover pool's assets to be isolated from the risk of the insolvency of the issuer, Swedbank Mortgage. This allows us to assign a higher rating to the covered bond program than our long-term issuer credit rating (ICR) on Swedbank Mortgage. JULY 31,

4 As of March 31, 2014, the assets backing the program comprised Swedish residential- and commercial-type mortgages, and public sector assets totaling SEK739.5 billion. The current outstanding amount of covered bonds in the program total SEK497.5 billion. Our measures of the weighted-average foreclosure frequency (WAFF; the level of defaults) and the weighted-average loss severity (WALS; possible losses given default) are 16.13% and 13.87%, respectively. These figures are based on a 'AAA' stress level. We apply our five-step approach for rating covered bonds under our ALMM criteria. We assess the ALMM risk of the covered bonds issued under Swedbank Mortgage's program as "low" and we categorize the program in Category 1 because it is a Swedish mortgage covered bond program. This combination allows for a rating that is seven notches above our long-term ICR on Swedbank Mortgage. The program's 48.62% available credit enhancement significantly exceeds the 20.51% target credit enhancement. We consider it to be commensurate with our 'AAA' ratings on the covered bonds. There are no rating constraints relating to counterparty, legal, country, or administrative and operational risks. We assess country risk based on our criteria "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, Under these criteria, we may rate the covered bonds up to six notches above our rating on the sovereign, Sweden (AAA/Stable/A-1+). As a result, country risk does not constrain our 'AAA' ratings on the covered bonds. We have based our analysis on the criteria articles referenced in the "Related Criteria" section. Program Description Sweden-based Swedbank Mortgage is a specialized mortgage bank and a core subsidiary of Swedbank AB. Swedbank Mortgage's operations are integrated with those of its parent company. Swedbank Mortgage mainly issues covered bonds, which are regulated by Swedish law and issued under a number of documents related to the same cover pool. All covered bonds issued under the program rank equally regardless of the program documentation. All assets are denominated in Swedish krona. Although the covered bonds are issued in a number of currencies, swap agreements mitigate exposure to foreign exchange risk (see "Payment structure and cash flow mechanics"). Swedbank acts as the issuer, bank account provider, and swap counterparty (see table 2). JULY 31,

5 Table 2 Swedbank Mortgage AB Role Name Rating Rating dependency Issuer Swedbank Mortgage AB A+/Negative/A-1 Y Bank account provider Swedbank AB A+/Negative/A-1 Y Swap provider Swedbank AB A+/Negative/A-1 Y Our "Covered Bond Ratings Framework: Methodology and Assumptions," published on June 26, 2012, (hereafter referred to as "covered bond ratings framework") organizes the general principles of credit ratings into three key stages: Performing an initial analysis of the covered bond issuer-specific factors; Determining the maximum achievable covered bond rating based on cover pool-specific factors; and Combining the results of these two steps to assign the final covered bond rating and by incorporating any additional factors, including counterparty risk and country risk. JULY 31,

6 Issuer-Specific Factors Legal and regulatory risks We base our analysis of legal risk on the guidelines in "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, In our opinion, the Swedish covered bond legal framework satisfies the relevant legal requirements of our covered bond criteria. This enables us to rate the covered bonds above our long-term ICR on Swedbank. Swedish covered bonds "saekerstaellda obligationer" are issued under the Swedish Covered Bond Act ("Lag 2003:1223 om utgivning av saekerstaellda obligationer"). The legal framework also includes secondary legislation that provides further guidance on the assessment of the cover pool's collateral value and general risk management. The latest covered bond legislation was introduced in 2004 and amended in 2010 (see "Revised Assumptions For Classifying Swedish Covered Bonds," published on June 11, 2010). The Swedish Financial Services Authority (FSA) added new regulatory provisions and guidelines as recently as Covered bond investors have a preferential claim to a cover pool of assets and to the issuer (but not to its parent company). The cover pool may comprise exposures to properties and rights equivalent to real property located in Sweden or a member state of the European Union. Under covered bonds law, mortgages may be used as security up to a certain estimated value of the property: 75% for residential properties, 70% for agricultural properties, and 60% for commercial properties. The cover pool may also include exposures to public-sector entities from a wider geographical area than is the case for the mortgage assets. Additionally, highly liquid assets can serve as substitute assets and can comprise up to 20% of the mortgage pool. There is no minimum required overcollateralization, but an issuer may commit to one. The Swedish covered bond law does not directly require that issuers cover 180 days of liquidity needs at all times, but the Swedish FSA requires that liquidity risk is addressed on a group level i.e., Swedbank ensures adequate liquidity for Swedbank Mortgage. An independent inspector (trustee) monitors the cover pool as long as the issuer is solvent. The law does not provide for a separate cover pool administrator if the issuer becomes insolvent. Instead, the receiver-in-bankruptcy represents all investors. The Swedish FSA appoints the receiver-in-bankruptcy, and also regularly conducts special covered bond supervision. Operational and administrative risks Our analysis of operational and administrative risk follows the principles laid out in "Principles Of Credit Ratings," published on Feb. 16, Savings banks operating under the Swedbank brand originates and services loans in the cover pool. We have conducted a review of Swedbank Mortgage's origination, underwriting, collection, and default management procedures for the program's cover pool assets. We also reviewed the cover pool's management and administration. We understand that Swedbank Mortgage's origination process will become less centralized than is currently the case, which may make credit standards difficult to control. However, in our view, this risk is offset by the issuer's strict and prudent underwriting procedures, adequate internal controls, and active management of the cover pool. JULY 31,

7 The originator of the loan services and administers all mortgage loans and public sector loans. Loans in arrears for more than 60 days are currently removed by the issuer from Swedbank Mortgage's cover pool. We have not identified any operational or administrative risks that would negatively affect our assessment of the program. We consider the servicing and origination procedures to be in line with other issuers. We have not applied any adjustments to reflect concerns about the originator in our credit analysis. Cover-Pool Specific Factors Asset credit quality Our analysis of the cover pool assets' credit quality follows our criteria for rating Swedish covered bonds (see "Criteria For Rating Swedish Covered Bonds," published on June 20, 2006). We assess asset credit quality using our 'AAA' stress of the WAFF and the WALS. We apply this 'AAA' stress scenario regardless of the outcome on the ratings on the covered bonds, in line with our ALMM criteria. We have based our analysis on loan-by-loan data as of March 31, The pool comprises seasoned loans over Swedish residential-, commercial-type mortgages, and public sector assets. Table 3 Pool Composition March 31, 2014 March 31, 2013 Asset type Value (bil. SEK) Percentage of cover pool (%) Value (bil. SEK) Percentage of cover pool (%) Mortgage assets Single family homes Condominium apartments Multi-family homes Housing associations Forest and agricultural assets Commercial assets Public sector assets Total cover pool assets As of the cut-off date, our WAFF and WALS assumptions were 16.13% and 13.87%, respectively, based on a 'AAA' stress level. This compares to 16.46% and 12.53%, respectively, as of March 30, Table 4 Key Credit Metrics As of March 31, 2014 As of March 31, 2013 Mortgage assets Current balance of residential mortgage loans in the cover pool (bil. SEK) Current balance of commercial-type mortgage loans in the cover pool (bil. SEK) Weighted average whole loan-to-value (LTV) ratio (%)* Weighted average cover pool loan-to-value (LTV) ratio (%) JULY 31,

8 Table 4 Key Credit Metrics (cont.) Weighted average loan seasoning (years) Weighted average term to maturity of the mortgages (years) Current arrears (%) Interest rate type Variable (61%) Variable (56 %) Credit analysis results Weighted average foreclosure frequency (WAFF; %) Weighted average loss severity (WALS; %) Asset default risk (%) Country averages: WAFF (%) WALS (%) Asset default risk (%) Public Sector Assets Current balance of public sector assets in the cover pool (bil. ) Scenario default rate (SDR, %) *Including all obligations on the property that are included cover pool. Adjusted for property price developments based on the Swedish property price index. Seasoning refers to the elapsed loan term. Table 5 Cover Assets By Loan Size* Residential mortgages (%) Commercial-type mortgages (%) (SEK '000s) As of March 31, 2014 As of March 31, 2013 As of March 31, 2014 As of March 31, Greater than *The data about the loans on single family homes is based on a representative sample. Table 6 Loan-To-Value Ratios* Residential mortgages Commercial-type mortgages (%) (%) As of March 31, 2014 As of March 31, 2013 As of March 31, 2014 As of March 31, Above JULY 31,

9 Table 6 Loan-To-Value Ratios* (cont.) Weighted average LTV ratios *The data about the loans on single family homes is based on a representative sample. Adjusted for property price developments based on the Swedish property price index. LTV--Loan-to-value. Table 7 Loan Seasoning Distribution* Residential mortgages Commercial-type mortgages Seasoning (months) As of March 31, 2014 As of March 31, 2013 As of March 31, 2014 As of March 31, 2013 Less than 18 months More than Weighted-average loan seasoning (months) *Seasoning refers to the elapsed loan term. The data about the loans on single family homes is based on a representative sample. Table 8 Geographic Distribution Of Mortgage Loans* Regions As of March 31, 2014 As of March 31, 2013 As of March 31, 2014 As of March 31, 2013 Götaland Norrland Svealand Total *The data about the loans on single family homes is based on representative sample Payment structure and cash flow mechanics Our analysis of the covered bonds' payment structure indicates that cash flows from the cover pool assets would be sufficient, at the current rating level, to make timely payment of interest and ultimate payment of principal to the covered bond holders. The covered bonds are exposed to ALMM risk because structural features, such as pass-through liabilities or committed liquidity arrangements, do not address this risk. To assess ALMM risk, we calculate the percentage of the cover pool that shows a mismatch between the maturities of the assets and the liabilities. For Swedbank Mortgage's covered bonds, we classify the ALMM percentage measure as "low" at 5.23%. The issuer constantly buys back covered bonds to manage refinancing risk. Based on the issuer's program management that we have observed in the past, we expect the ALMM of Swedbank Mortgage's covered bonds to remain in our "low" classification over the next year. In the absence of active program management, this measure could fall into the "moderate" classification within six months' time, all other things being equal. Under our ALMM criteria, the combination of "low" ALMM risk and Category 1 means that we can rate the program JULY 31,

10 up to seven notches above our 'A+' long-term ICR rating on Swedbank Mortgage. This means that the covered bonds can achieve a maximum rating of 'AAA' if the available credit enhancement is at least equal to our target credit enhancement and if other factors, such as counterparty or country risk, do not constrain our rating. Swedish residential mortgage loans do not always have a final agreed amortization profile. Instead, borrowers periodically agree with lenders the amount of principal they will repay over a given timeframe for example, the following year and may choose to pay no principal over the period. Banks often allow borrowers to roll over these interest-only periods, in part because it may be more profitable for the lender if the borrower purchases investment products rather than amortizes their mortgage loan. As a result, loans can remain interest-only for considerable periods and may not have a formal amortization schedule for the whole legal mortgage term. We consider this issue in our cash flow analysis. We would generally expect a cover pool administrator (to be assigned after the default of the issuer) to extend credit to the borrowers and agree to an overall repayment profile that is no longer than the period covered by the protection offered by the Swedish consumer protection act. We therefore generally consider interest-only loans with no history of amortization to have a legal final maturity of 30 years. We analyze commercial loans according to their legal final maturity. We analyze cash flows under 'AAA' credit stresses, as well as liquidity and interest rate stresses. We consider various default and prepayment patterns. We model the program on a post-swap basis considering the swap which is in place to hedge interest rate mismatches between the assets and liabilities. For assessing market value risk we apply a target asset spread in our cash flow analysis. We apply a spread of basis points as outlined in our criteria for "Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads," published on April 24, We analyzed the cash flows according to our criteria as set out in "Update To The Cash Flow Criteria For European RMBS Transactions," published Jan. 6, 2009, and "Cash Flow Criteria for European RMBS Transactions," published Nov. 20, Based on this analysis, we have determined that the available credit enhancement of 48.62% exceeds the target credit enhancement of 20.51%, which we consider to be commensurate with our 'AAA' rating. Table 9 Swedbank Mortgage Covered Bonds ALMM Metrics As of March 31, 2014 As of March 31, 2013 Asset WAM (years) Liability WAM (years) Maturity gap (years) ALMM (%) ALMM classification Low Low Maximum uplift above issuer rating (notches) 7 7 Target credit enhancement for maximum uplift (%) Target credit enhancement for first notch of uplift (%) Available credit enhancement (%) Country averages Weighted average ALMM (%) JULY 31,

11 Table 9 Swedbank Mortgage Covered Bonds ALMM Metrics (cont.) Target credit enhancement (%) Available credit enhancement (%) ALMM--Asset-liability maturity mismatch. WAM--Weighted-average maturity. Additional Factors Counterparty risk We consider the program's counterparty risks to have been structurally addressed, and therefore they do not constrain our rating on the program. Bank account risk: Borrowers currently pay their mortgages into accounts held with Swedbank AB. Swedbank Mortgage has publicly committed on Swedbank's website to replace the accounts holding the collections with an appropriately rated bank if our rating on Swedbank were to fall below the minimum rating that we view as being commensurate with the credit enhancement that is sufficient to support a 'AAA' rating. Therefore, we did not size any bank account risk in our analysis. Commingling risk: Cover pool-related cash flows are segregated from other cash flows of Swedbank Mortgage in accordance with the Swedish covered bond law. Therefore, we don't consider these funds to be commingled. Therefore, we did not size any commingling risk in our analysis. Interest rate and foreign exchange risk: The issuer uses derivatives to manage the risks in accordance with the law. The swap agreements fully comply with our current counterparty criteria. The "Option 2" replacement framework is currently in place with the possibility to switch to the replacement framework described in "Option 1". Therefore, we give benefit to these swaps in our cash flow analysis. We analyzed the counterparty risk in Swedbank Mortgage's covered bond program using our current counterparty criteria. Country risk We assess country risk based on our nonsovereign ratings criteria. We consider the mortgage assets to have a "low" sensitivity to country risk. Therefore, under these criteria, we may rate the covered bonds up to six notches above our rating on the sovereign, Sweden (AAA/Stable/A-1+). As a result, country risk does not constrain the 'AAA' ratings on the covered bonds. Potential Effects Of Proposed Criteria Changes Our ratings are based on our applicable criteria, including those set out in the criteria articles "Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds," published on Dec. 16, 2009, and "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, However, please note that these criteria are under review (see "Advance Notice Of Proposed Criteria Change For Covered Bonds," published on April 29, 2014, and "Request for Comment: Methodology and Assumptions For JULY 31,

12 Ratings Above The Sovereign--Single Jurisdiction Structured Finance," published on Oct. 14, 2013). As a result of this review, our future criteria applicable to rating covered bonds may differ from our current criteria. These criteria changes may affect the ratings on the outstanding covered bonds issued by Swedbank Mortgage. Until such time that we adopt new criteria, we will continue to rate and surveil these covered bonds using our existing criteria (see the list of related criteria below). Related Criteria And Research Related research Group Rating Methodology, Nov. 19, 2013 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012 Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012 Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Revised Assumptions For Categorizing Swedish Covered Bonds, June 11, 2010 Methodology: Credit Stability Criteria, May 3, 2010 Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009 Criteria For Rating Swedish Covered Bonds, June 20, 2006 Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003 Related research European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Swedbank Mortgage AB Swedish Covered Bond Ratings Affirmed At 'AAA/A-1+'; Outlook Stable, June 25, 2014 Advance Notice Of Proposed Criteria Change For Covered Bonds, April 29, 2014 Global Covered Bond Characteristics And Rating Summary Q1 2014, March 14, 2014 Proposed Swedish Mortgage Loan Amortization Plans Could Increase Covered Bonds' Asset Paydown Rates, Oct. 17, 2013 Request for Comment: Methodology and Assumptions For Ratings Above The Sovereign--Single Jurisdiction Structured Finance, Oct. 14, 2013 Swedbank AB, Aug. 19, 2013 A Listing Of S&P's New Actions Aimed At Strengthening The Ratings Process, Feb. 7, 2008 Additional Contact: Covered Bonds Surveillance; CoveredBondSurveillance@standardandpoors.com JULY 31,

13 Copyright 2015 by Standard & Poor's Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc.All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P s opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at JULY 31,