Covered bonds issued by Dexia LdG Banque were downgraded by Standard & Poor’s from AAA to AA, CreditWatch negative, yesterday (Wednesday) because the rating agency now considers the issuer to be a core entity of Dexia Crédit Local rather than Banque International à Luxembourg.

S&P said that amid the restructuring of the Dexia group, BIL will be sold and prior to this sale Dexia LdG Banque (DLdG) will be transferred to the Dexia group with operating support from Dexia Crédit Local (DCL). DCL’s rating is therefore the anchor above which S&P will grant uplift to arrive at the rating for DLdG’s covered bonds.

DCL is rated BBB, CreditWatch negative, by S&P and under the rating agency’s methodology DLdG’s covered bonds can be rated a maximum of six notches above this, hence the AA rating. The maximum six notch uplift is based on a programme categorisation of “2”, based on S&P’s view of Luxembourg’s covered bonds, and an asset-liability mismatch (ALMM) classification of “low”.

“These covered bond ratings remain on CreditWatch negative, to reflect the risk that any further downgrade of DCL would result in an automatic downgrade of DLdG’s covered bonds (all else remaining equal), and because our rating on DCL is currently on CreditWatch negative,” said S&P.