Terra BoligKreditt will tomorrow (Friday) finalise changes to its ownership structure and financial support mechanism that the Norwegian issuer hopes will give it a chance of having its issuer and covered bond ratings upgraded by Moody’s to Aa1, according to its CEO.

Under the changes, announced in December, ownership of Terra BoligKreditt (TBK) will pass from holding company Terra Gruppen AS to the 79 savings banks that are members of the group and Oslo Bolig-og Sparelag (OBOS), Norway’s largest housing corporation. Ownership will be based on individual banks’ shares of the lending volume of TBK and will be reallocated annually.

A support arrangement (note purchase agreement/NPA) under which the new owners are obliged to ensure that TBK has sufficient liquidity, at all times, to repay maturities in a rolling 12 month period will replace a Nkr3bn standby facility. Additionally, a new shareholder’s agreement has been structured to ensure that the banks and OBOS support TBK with capital to uphold the capital adequacy ratio at all times.

Kjartan Bremnes, chief executive officer of Terra BoligKreditt, told The Covered Bond Report that the main objective of the moves was to improve the issuer’s rating position.

TBK’s covered bonds are rated Aa2 by Moody’s but its issuer rating is not disclosed. However, Moody’s has said that the Aa2 rating incorporates the maximum uplift available to TBK given a Timely Payment Indicator (TPI) of “high”, which implies an issuer rating of Baa3.

“Based on our understanding of the rating methodology, we have reason to expect that the new set-up should improve Moody’s categorisation of the financial support mechanism from TBK’s owners, so it should have an issuer rating just one notch below the owners,” said Bremnes.

An improvement in TBK’s issuer rating from Baa3 to Baa2 would, according to Moody’s TPI matrix, imply a lifting of the maximum achievable rating for TBK’s covered bonds from Aa2 to Aa1.

In spite of the Aa2 rating of its covered bonds, Terra BoligKreditt has achieved pricing close to the Aaa issuance of its Norwegian peers. However, Bremnes said that the precautionary move made sense given that before the change a one notch downgrade of the issuer could have led to a sharp downgrade from Aa2 to A2 given Moody’s TPI methodology.

“We have been able to set issues at quite good levels in the market,” he said, “so we have been able to live quite well with the Aa2 rating. But we felt that we needed to act in case there was a change in the rating situation or rating methodology.

“A main reason that we have been able to do so well until now,” he added, “is that in Moody’s Covered Bonds Monitoring Overview we have been in the top 10 both in terms of our cover pool credit quality (collateral scores) and with lowest cover pool losses.”

Bremnes said that the change in the support arrangement did not require bondholder consent because the NPA, covering a rolling 12 month liquidity need, would increase the amount of support from that available under the Nkr3bn standby facility.

The ownership of 80% TBK’s shares was transferred from Terra Gruppen AS to its member banks and OBOS last Thursday (10 May) and the remaining 20% will be transferred to the banks and OBOS tomorrow.