Denmark’s BRFkredit has said that it asked Moody’s to withdraw immediately its ratings of the issuer and its covered bonds ahead of the rating agency today (Thursday) downgrading two of its capital centres in what BRFkredit called a “reaction” to the termination of its contract with Moody’s. S&P is expected to assign ratings to BRFkredit covered bonds soon, and an official at the issuer told The Covered Bond Report that ratings from Fitch are a possibility.

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Moody’s today cut BRFkredit covered bonds issued out of Capital Centres B and E from Aa3 and Aa2, respectively, to A1 after what it said was “limited” progress on restructuring of these programmes. It affirmed at Aa3 the ratings of covered bonds issued out of General Capital Centre because of the removal of short term bullet bonds.

The rating actions come after BRFkredit terminated cooperation with Moody’s, a move that was announced on Monday in a press release setting out the reasons for the bank’s decision.

“This is a consequence of prolonged disagreements about the rating method, Moody’s view on Danish mortgage credit and particularly BRFkredit, and an increase in required over collateral from Dkr11.6bn before 27 June 2011 to Dkr22.3bn today,” said the bank.

The statement continues: “Furthermore, Moody’s now requires that similar to the commitment already made for Capital Centre E, a commitment must be made in the prospectus for Capital Centre B and the General Capital Centre about the presence of the required over collateral, however, this will result in an inappropriate and binding capital structure for BRFkredit.

“As regards the General Capital Centre, BRFkredit finds that such a commitment would conflict with Danish law as the General Capital Centre is obliged to supplement other capital centres with capital as long as the General Capital Centre complies with the solvency requirement.”

As a final reason, BRFkredit said: “Moody’s will no longer accept the current wording of the statement in the prospectus of Capital Centre E that if Moody’s is no longer rating BRFkredit’s bonds, the required over collateral could be adjusted or cancelled if a corresponding or better rating from another internationally acknowledged rating agency is achieved.

“However, BRFkredit finds that such exclusivity to Moody’s is neither in the interest of investors nor BRFkredit.”

Carsten Tirsbæk Madsen, executive vice president at BRFkredit, told The Covered Bond Report that the issuer was “quite surprised” by Moody’s rating action on its covered bonds today, and compared it with the rating agency’s withdrawal of Realkredit Danmark’s covered bond ratings a few months ago after the issuer had cancelled its contract with Moody’s.

“They treat us differently,” he said. “If that’s what they want to do that’s what they want to do.”

BRFkredit today issued a statement, “Moody’s reacts to BRFkredit’s termination of cooperation by downgrading BRFkredit”, saying that it has “requested Moody’s immediately to withdraw their ratings of BRFkredit and BRFkredit’s capital centres”.

It added: “Although BRFkredit has enough capital to fulfil the requirements stated by Moody’s to maintain an Aa2 rating in Capital Centre E and an Aa3 rating in Capital Centre B and General Capital Centre, Moody’s do not recognize the capital, because it has been impossible to reach an agreement with Moody’s about the binding declaration described above.

“In consequence, Moody’s only add to value the amount of capital required by law (8% solvency requirements), for which reason Moody’s downgrade Capital Centre E and B.”

BRFkredit requested Moody’s withdraw its ratings at the same time as giving notice of termination, on Monday, according to Madsen.

In its statement announcing the rating actions on BRFkredit’s covered bonds today, Moody’s said that since the downgrade of the issuer three months ago (from Baa1 to Baa3) “limited progress has been made on the issuer’s proposals to restructure the capital centre B and E programmes”.

“In particular, no overcollateralisation (OC) that Moody’s would consider ‘committed’ has been added to the programmes, and, for issuers rated at Baa3, Moody’s limits the reliance placed on OC that can be removed at the issuer’s discretion,” it added.

The rating agency also lowered the Timely Payment Indicators (TPIs) assigned to the covered bonds, to “probable” for Capital Centre B and “probable-high” for Capital Centre E and General Capital Centre.

Moody’s was not able to respond to all questions posed by The Covered Bond Report by the time of going to press, but a spokesperson said: “Moody’s downgrade of BRFKredit’s issuer rating on 1 July to Baa3 from Baa1 reflects Moody’s concerns over BRF’s future loan-origination strength and weakened profitability, as well as the institution’s substantial level of refinancing risk. Moody’s downgraded mortgage covered bonds issued by BRFkredit as a consequence of Moody’s downgrade of the issuer rating.”

S&P ratings expectations, Fitch a possibility

In a reaction to changes to the way Moody’s assesses refinancing risk posed by adjustable rate mortgages (ARM) BRFkredit in July initiated cooperation with Standard & Poor’s to obtain an issuer rating and ratings of its capital centres, with the rating agency yesterday (Wednesday) assigning a A- issuer rating, on stable outlook.

BRFkredit in today’s statement noted that this rating is three notches higher than the long term issuer rating from Moody’s.

It said that it expects to announce within a few days S&P ratings regarding BRFkredit’s bonds and the future structure of its capital centres, but said that it expects bonds issued from Capital Centre E to achieve a minimum rating of AA+ and bonds issued from Capital Centre B and the General Capital Centre a minimum rating of AA-.

According to Madsen, obtaining covered bond ratings and an issuer rating from Fitch is a possibility.

“We have not decided on that yet,” he said, “but history has told us that having more than one rating is not a bad thing.”