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					Investment Research
                                                                                           29 July 2011




Flash Comment
Moody’s take action on Danish covered bonds
Moody’s announced yesterday a series of rating actions on Danish covered bonds. In this
                                                                                           Today’s key points
document we briefly describe the action taken by Moody’s and attempt to assess the
market impact focusing on the downgrade of Nykredit Capital Centre D.                          Moody’s has downgraded
                                                                                                Nykredit Capital Centre D from
The major headlines are as follows.
                                                                                                Aaa to Aa1 but confirmed all
   Moody’s has downgraded Nykredit Capital Centre D from Aaa to Aa1 but confirmed              other Nykredit Capital Centre
    all other Nykredit Capital Centre including Totalkredit Capital Centre C.                   including Totalkredit Captal
   Moody’s has placed all BRFkredit covered bonds on review for downgrade.                     Centre C.

   Moody’s has confirmed DLRkredit at Aa1 (both General Capital Centre and Capital            Moody’s has placed all BRFkredit
    Centre B) but lowered the TPI (Timely Payment Indicator) from ‘High’ to ‘Probable-          covered bonds on review for
    High’.                                                                                      downgrade.

   Moody’s has withdrawn the ratings of Realkredit Danmark’s covered bonds at the             Moody’s has confirmed DLRkredit
    request of the issuer (although Moody’s claim to have withdrawn the ratings “for its        at Aa1 but lowered the TPI
    own business reasons”).                                                                     (Timely Payment Indicator) from
                                                                                                ‘High’ to ‘Probable-High.’
The announcement did not contain any information regarding Nordea Kredit. The rating
actions follow Moody’s previous downgrades of the respective issuer ratings and                Moody’s has withdrawn the
Moody’s assessment of the issuer’s response to Moody’s request for further credit               ratings of RD’s covered bonds.
enhancements.                                                                                  The downgrade of Nykredit’s
Below we provide a table with covered bond ratings and overcollateralisation (OC)               Capital Centre D from Aaa to Aa1
requirement for all capital centre rated by Moody’s.                                            will have a negative market
                                                                                                impact on bonds issued out of
Table 1. Covered bond ratings and OC requirement                                                Capital Centre D.

Capital centre                         Covered bond rating     Minimum OC requirement          In particular, bonds with a high
Nykredit CC D                                         Aa1                         2.5%          spread risk and bonds with a high
Nykredit CC E                                         Aaa                        11.5%          share of pension funds investors
Nykredit CC G                                         Aa1                        14.0%
                                                                                                and/or foreign investors will be
Nykredit General CC                                   Aa1                         0.5%
                                                                                                affected.
Totalkredit CC C                                      Aaa                         3.0%


DLR CC B                                              Aa1                        15.0%
DLR General CC                                        Aa1                         8.0%


BRF CC B                                              Aa3                         8.5%
BRF CC E                                              Aa2                        14.5%
BRF General CC                                        Aa3                         5.0%


RD CC S                                        Withdrawn                         18.0%
RD General CC                                  Withdrawn                          5.5%     Senior Analyst
                                                                                           Christian Riemann-Andersen
Source: Moody's                                                                            +45 4512 8565
                                                                                           chande@danskebank.dk

                                                                                           Senior Analyst
                                                                                           Christina Emilia Falch
                                                                                           +45 4512 7152
                                                                                           chfa@danskebank.dk


Important disclosures and certifications are contained from page 6 of this report.

                                                                                           www.danskeresearch.com
Flash Comment




Actions regarding Nykredit
The biggest surprise in yesterday’s announcement was probably the downgrade of
Nykredit’s Capital Centre D. Nykredit stated that the cost of defending the Aaa rating (i.e.
providing OC) was simply too high and would pose a potential financial risk in the future
for Nykredit. The surprise is anchored in the fact that prior to yesterday’s announcement
Nykredit provided an OC of 5.7%, which was close to the 7.0% requirement Moody’s
sent out 1 July. However, we have been informed by Nykredit that the actual requirement
was substantial higher than 7%. The significant increase in OC requirement is not related
to any worsening of credit quality (actually the collateral score has been unchanged over
the recent quarters) but attributable alone to Moody’s tougher stance on mortgage loans
with refinancing (both interest reset loans funded by non-call bonds and xIBOR-related
products that are refinanced). These loans currently constitute roughly 38% of the total
capital centre.

Following the downgrade to Aa1 Nykredit has to provide an OC of only 2.5%. However,
the level currently provided (5.7% as of 31 March 2011) is close to the 5.3% required to
maintain the AAA at S&P (data of December 2010) so investors should not expect a large
fall in the provided OC and there will be no significant transfer of OC from Capital
Centre D to, for example, Capital Centre E.

Regarding Capital Centre E, Nykredit yesterday announced how it will gradually phase in
Moody’s OC requirement of 11.5%. Nykredit currently provides OC (as of 31 March
2011) of 7.1% and intends to increase this to 8% in October 2011, to 10% in January
2011 and expects to reach the 11.5% target in April 2012. In absolute numbers, Nykredit
will have to add OC of DKK8bn. Hereafter, Nykredit expects the OC requirement to
decline gradually again towards 6% as interest-reset loans are refinanced into a new
capital centre.

Concerning the new capital centre, Nykredit could not provide any details on the expected
ratings but clearly did not rule out that the new centre could receive a spilt rating, i.e.
AAA from S&P and only Aa1 from Moody’s, given their tough stance on interest reset
loans. Moody’s requires three times as much OC for loans with an embedded refinancing
than for loans without refinancing. Hence, a capital centre for refinancing loans only
would probably face an OC requirement in the region of 15-18%.
Actions regarding BRFkredit
Moody’s has placed BRFkredit’s covered bonds from Capital Centre B and E as well as
the General Capital Centre on review for downgrade “to reflect ongoing discussions with
BRF on their plans for the programmes”. Moody's says it will consider BRF's proposal to
restructure the programmes “and these proposals may include a transfer of ARM loans
into a new Capital Centre H, as well as the addition of further collateral to existing
programmes”. In the case of the General Capital Centre, “BRF is also exploring with the
Danish FSA whether it is possible to add collateral in a form Moody's considers
‘committed’”.
Actions regarding DLRkredit
For DLRkredit Moody’s affirmed the Aa1 rating of both Capital Centre B and the
General Capital Centre. However, Moody’s notes that the committed OC (i.e. OC for
which the issuer is restricted in moving at its own discretion) provided by DLRkredit in
both capital centres translates into ratings of only Aa2. However, given the level of the
total OC provided (i.e. both committed and voluntary) and that reliance on voluntary OC
is limited to one notch, Moody’s has decided to stick with the Aa1 rating.




2|   29 July 2011
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Flash Comment




However, Moody’s has decided to lower the TPI from ‘High’ to ‘Probable-High’. This
stems from the fact that for issuers rated below single A, Moody's considers the level of
OC in committed form relative to the level of expected cover pool losses. Given the
current ratio for both capital centres, Moody's has lowered the TPI. As a consequence,
given the issuer rating of Baa1, there is no TPI-leeway for either capital centre. Hence, a
one-notch downgrade of the issuer rating would feed directly through to a one-notch
downgrade of the covered bonds to Aa2. DLRkredit’s issuer rating is currently on
negative outlook (this also goes for Nykredit and BRFkredit).
Actions regarding Realkredit Danmark
Moody’s has withdrawn the Aaa ratings for both Capital Centre S and the General Capital
Centre. Moody’s notes that while RD has announced that it could honour the 18% OC
requirement in Capital Centre S this was not done and that the level provided prior to the
withdrawal of 10.1% was consistent only with a Aa2 rating.
Expected markets impact on Nykredit’s Capital Centre D
We expect the downgrade of Nykredit’s Capital Centre D from Aaa to Aa1 to have a
negative market impact on the bonds issued out of Capital Centre D and , in particular, to
affect bonds with a high spread risk and bonds with a high share of pension fund investors
and/or foreign investors.

We expect to see a negative price effect on RO bonds as a result of the impact from
Solvency II when the RO bonds in capital centre are downgraded from Aaa to Aa1 as the
capital charge for pension funds will double. In the final technical specifications for
Solvency II the capital charge due to the spread risk will thus be calculated according to
the formula below.

 MV  duration
     i       i          i    F up (rating i )

Fup(rating) is set according to rating and duration (see table below).

Table 2. The new spread risk weights

New                                 F(rating) up         Duration floor      Duration cap
AAA (UCITS)                               0.6%                       1                53
AAA                                       0.9%                       1                36
AA                                        1.1%                       1                29
A                                         1.4%                       1                23
BBB                                       2.5%                       1                13
BB                                        4.5%                       1                10
B or lower                                7.5%                       1                  8
Unrated                                   3.0%                       1                12
Source: CEIPOS


The downgrade by Moody’s of Nykredit’s Capital Centre D will result in an increase of
the F(rating) factor from 0.6% to 1.1%, which means the capital charge under Solvency
II will almost double. Nykredit’s Capital Centre D also has an AAA rating from S&P but
according to Solvency II the second highest rating must be used in the calculation of the
capital charge. However, there is a possibility that Nykredit could get an AAA rating
from Fitch before the implementation of Solvency II. In this case, the lower rating from
Moody’s would not have an effect on the capital charge for pension funds.




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Flash Comment




The increase in capital charge will, in particular, have an effect on bonds with a high
spread risk such as long-dated floaters and capped floaters and callable low-coupon
mortgage bonds. In the enclosed Appendix we calculate the difference in the return
requirement under Solvency II for a selection of Danish covered bonds under the
assumption that the bonds are downgraded from Aaa to Aa1. As shown in the table the
return requirement would increase by 20-40bp for the long-dated floaters and capped
floaters and callable low-coupon mortgage bonds. If we look at the bond types and the
maturity profile of the bonds in Capital Centre D, there is a relatively large amount of
long-dated floaters, capped floaters with maturity 2018 and 2038 in Capital Centre D (see
the chart below).

Chart 1. Maturity profile of the bonds in Capital Centre D

                                   Capped floaters                        Floaters             Callables              Non-callables
     100
     80
     60
     40
     20
      0
           2011
                  2012
                         2013
                                2014
                                       2015
                                              2016
                                                     2017
                                                            2018
                                                                   2019
                                                                          2020
                                                                                 2021
                                                                                        2022
                                                                                               2023
                                                                                                      2025
                                                                                                             2026
                                                                                                                    2028
                                                                                                                           2031
                                                                                                                                  2033
                                                                                                                                         2034
                                                                                                                                                2035
                                                                                                                                                       2036
                                                                                                                                                              2038
                                                                                                                                                                     2041



Source: Danske Markets


The implications of a lower rating in Solvency II is also crucial for new RO bonds issued
after 1 January 2008. Until now the pension fund sector has bought the new RO bonds,
which are cheaper than the corresponding SDO bonds, because they are not CRD
compliant and there is a higher risk weight for banks. If we take a closer look at the bond
type composition in Capital Centre D, the new RO bonds amount to around 15% of the
total outstanding amount of mortgage bonds (see the table below).

Table 3. Bond type composition in capital centre D

Volume (DKKbn)                                                                             DKK                                    EUR                                Total
Grandfathered RO                                                                        233.5                                     31.4                               264.9
 - Callables                                                                            107.0                                       1.1                              108.1
 - Capped floaters                                                                         84.8                                     0.4                               85.2
 - Floaters                                                                                25.8                                   29.2                                55.0
 - Non-callables                                                                           15.9                                     0.7                               16.5
New RO (20% risk weight)                                                                   36.9                                     9.4                               46.3
 - Floaters                                                                                27.6                                     0.3                               27.9
 - Non-callables                                                                               9.1                                  9.1                               18.2
 - Callables                                                                                   0.2                                  0.0                                 0.2
Total                                                                                   270.4                                     40.7                               311.1
Source: Danske Markets


Some foreign investors in Danish covered bonds could also be affected by the downgrade
of Nykredit’s Capital Centre D due to investment regulations that allow investments only
in Aaa rated bonds. In this case, some foreign investors could be forced to sell their
holdings of Danish covered bonds.




4|    29 July 2011
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Flash Comment




Looking at the investor distribution of the 10 biggest bond series in Capital Centre D,
there is a high investor share of life insurance and pension funds investors and/or foreign
investors in the 4’35, 5’38, 5’38io, CF 5’38, FRN Jan-13, FRN Jan-18 and FRN Jan-38
(see the table below). As mentioned earlier, these investor segments will be affected by a
lower rating for Capital Centre D and hence there is a risk that we could see some selling
of these bonds.

Table 4. Investor distribution on a selection of bonds in Capital Centre D as of June 2011

                 975729          976016         976148          976326        976466        976563        976571     976601       976644       978027
                       4'35         5'38io      CF 5'38              5'38     CF 5'17io    FRN 2018     FRN 2018     CF 5'18io   FRN 2038   FRN 2013
                     Grand       New RO              Grand          Grand          Grand       Grand         Grand      Grand       Grand       Grand
Non-financial                                                                                                 0.0%
institutions         26.9%          14.0%            2.3%           12.4%          14.5%       12.5%                     7.5%       12.6%        1.5%
Financial
institutions         17.6%          35.3%        59.7%              36.8%          57.7%       24.2%        86.2%      75.7%        25.8%       37.0%
Life insurance
Pension funds        12.8%          19.3%        29.3%              18.5%           6.3%       57.7%          4.0%       3.4%       26.4%       25.0%
DsP and SP            0.9%           3.5%            1.2%            2.2%           9.6%        3.8%          0.0%       4.3%        0.5%        0.1%
Households           15.2%          10.5%            1.3%            7.9%           6.9%        1.7%          0.1%       2.8%        2.6%        0.1%
Other
domestic              1.2%           1.9%            0.9%            1.5%           0.7%        0.3%          0.1%       0.8%        1.1%        0.5%
Foreigners           25.4%          15.5%            5.4%           20.7%           4.3%        0.0%          9.7%       5.4%       31.0%       35.8%
Source: Danske Markets




Appendix
Table 5. Capital charge and return requirement for Aaa and Aa1 rated bonds under Solvency II

Bond                Bond                     Price      Spread                      Capital charge                        Return requirement
Type                                                         risk           Aaa             Aa1        Difference       Aaa          Aa1    Difference
Callable            4’38                     96.20            6.8           4.1%            7.5%           3.4%         28.5        52.2         23.7
Callable            4’38io                   95.75            7.3           4.4%            8.1%           3.7%         30.8        56.4         25.6
Callable            4’41                     94.55            7.3           4.4%            8.0%           3.6%         30.6        56.1         25.5
Callable            4’41io                   93.55            8.3           5.0%            9.1%           4.1%         34.8        63.7         29.0
Callable            5’41                 100.60               5.6           3.4%            6.2%           2.8%         23.6        43.2         19.6
Callable            5’41io                   99.80            6.0           3.6%            6.6%           3.0%         25.3        46.4         21.1
Callable            6’41                 105.20               4.1           2.4%            4.5%           2.0%         17.1        31.3         14.2
Callable            6’41io               104.75               4.3           2.6%            4.8%           2.2%         18.2        33.3         15.1
Callable            7’41                 108.45               3.7           2.2%            4.1%           1.9%         15.7        28.8         13.1
Callable            5’31                 102.80               4.7           2.8%            5.2%           2.3%         19.7        36.1         16.4
Callable            4’31                     97.80            5.8           3.5%            6.3%           2.9%         24.2        44.4         20.2
Non-call.           RD 2’12 (Jan)        100.23               0.4           0.3%            0.5%           0.2%          1.8         3.3          1.5
Non-call.           RD 2’14 (Jan)            99.74            2.4           1.4%            2.6%           1.2%         10.0        18.3          8.3
Non-call.           RD 2’16 (Jan)            96.99            4.4           2.6%            4.8%           2.2%         18.3        33.6         15.3
Capped floater      CF 5’18io                98.10            5.7           3.4%            6.3%           2.9%         24.0        44.0         20.0
Capped floater      CF 6’38                  96.68           10.9           6.5%           11.9%           5.4%         45.6        83.6         38.0
Capped floaters CF 5’38                      95.64           10.8           6.5%           11.9%           5.4%         45.3        83.1         37.8
Floater             FRN Jan-12           100.45               0.4           0.3%            0.5%           0.2%          1.8         3.2          1.5
Floater             FRN Jul-18               99.00            6.3           3.8%            6.9%           3.1%         26.4        48.5         22.0
Floater             FRN Oct-38               93.25           17.2       10.3%              18.9%           8.6%         72.1       132.2         60.1
Source: Danske Markets




5|   29 July 2011
                                                                                                              www.danskeresearch.com
Flash Comment




Disclosure
This research report has been prepared by Danske Research, a division of Danske Bank
A/S ("Danske Bank"). The authors of the research report are Christian Riemann-
Andersen, Senior Analyst, and Christina Emilia Falch, Senior Analyst.
Analyst certification
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views expressed in the research report accurately reflect the research analyst’s personal
view about the financial instruments and issuers covered by the research report. Each
responsible research analyst further certifies that no part of the compensation of the
research analyst was, is or will be, directly or indirectly, related to the specific
recommendations expressed in the research report.
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See http://www-2.danskebank.com/Link/researchdisclaimer for further disclosures and
information.




6|   29 July 2011
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Flash Comment




General disclaimer
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is provided for informational purposes only. It does not constitute or form part of, and
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