Earlier today, rating agency Standard & Poor’s lowered its long-term issuer credit rating on KommuneKredit from AAA to AA+ (with stable outlook), while affirming its short-term credit rating at the highest level, A-1+.
Standard & Poor’s announced on 22 May 2018 that it had placed KommuneKredit “Under Criteria Observation” due to a change in the agency’s criteria for public-sector finance agencies, such as KommuneKredit.
The lowered rating follows an 18-year period in which Standard & Poor’s accorded KommuneKredit a rating of AAA and is due exclusively to a change in Standard & Poor’s criteria, not to a change in KommuneKredit’s business. KommuneKredit has never in its 120-year history recorded loan losses.
According to Standard & Poor’s the downgrade is due to two conditions. Firstly, Standard & Poor’s has determined KommuneKred-it’s risk-adjusted capital (RAC) ratio to be 15.1 pct., which in accordance with their model corresponds to the grade “very strong”. However, Standard & Poor’s chooses to lower the grade to “strong”, as they believe there is a “trend” towards a greater part of KommuneKredit’s lending being concentrated on the largest borrowers – meaning Danish municipalities. KommuneKredit has been unable to locate said trend in the last 5 years of realized lending and do not expect to do so in the future. Secondly, Standard & Poor’s has taken a new step of dividing KommuneKredit’s excess liquidity into maturity intervals according very limited liquidity value to investments with 12-month+ maturities, regardless of how liquid such investments may be.
KommuneKredit’s liquidity buffer is invested in AAA- and AA-rated European government or mortgage bonds with maturities of up to five years. Such bonds are considered to be High Quality Liquidity Assets (Level 1 HQLA) in European financial regulations (CRD IV / CRR), but have only limited liquidity in Standard & Poor’s new model.
While we will not change our business model, we do understand that for example amending the maturity of our already highly secure and liquid investments will give us the opportunity to have our rating from Standard & Poor’s restored to AAA. We will consider whether doing so would be in our members’ best interest.
KommuneKredits has a long term rating of Aaa and a short term rating of P-1 from Moody’s Investor Services. Outlook is stable.
We will host a conference call on Friday, 27 July 2018, 14:00 CET, at which we will be taking questions about Standard & Poor’s amended view on KommuneKredit.
Jens Lundager, CEO
CONFERENCE CALL DETAILS:
Telephone: +45 70 15 15 95
Access code: 9168422
Henrik Andersen, Managing Director
Morten Søtofte, Chief Financial and Risk Officer
Lasse Vest, Vice President, Funding