Ålandsbanken, a small bank with operations concentrated in the autonomous Swedish speaking Åland islands of Finland, has set up a Eu1bn covered bond programme and, according to Standard & Poor’s, intends to issue euro deals of up to Eu150m.

After receiving a licence to issue covered bonds by the Finnish Financial Supervisory Authority (FSA) on 29 July, the issuer late last year finalised a Eu1bn EMTN and covered bond programme. Ålandsbanken Abp was the arranger, with Danske Bank and SEB as dealers, and Dittmar & Indrenius, Allen & Overy, and Clifford Chance as legal advisers.

Flag of the Åland islands

S&P yesterday (Tuesday) assigned a preliminary rating of AA to the programme, which is backed by a cover pool of Finnish private residential mortgage loans totalling Eu1.19bn at the set-up date.

The rating agency said that it understands that Ålandsbanken plans to launch several smaller issues with a mix of maturities, denominated in euros, but may choose to issue covered bonds in other currencies at a later date.

Click here for previous coverage of Ålandsbanken’s issuance plans.

It has assigned the programme to Category 2 under its programme classification system because it considers the cover pool to be typical for Finnish covered bonds, and assessed the asset-liability mismatch (ALMM) to be “low”. This means that the programme could be rated up to six notches higher than the issuer credit rating, with S&P noting that it anticipates that the cover pool will be able to fully support this potential rating uplift. Available credit enhancement of 242% compares with a target credit enhancement of 16.6% that is commensurate with the highest rating, according to the rating agency.

However, it said that under its counterparty criteria the creditworthiness of the bank acting as an account bank is not sufficient to support the highest rating achievable according to the rating agency’s ALMM criteria, and that the issuer intends to register liquid assets to mitigate the potential transaction account risk and achieve the highest rating achievable under the ALMM criteria.

The liquid assets will be worth a maximum of the larger of Eu120m or 10% of the cover pool asset balance. Should prepayment increase above 5% on a quarterly basis and 15% on a yearly basis, said S&P, all collected prepayments are channelled into the liquid assets holdings and registered to the benefit of the covered bondholders. The same happens if the amount increases above the minimum of Eu120m.

“Under normal circumstances, the Finnish covered bond law allows for a maximum of 20% of cover pool assets to be in the form of liquid assets or cash,” said S&P. “Given that the issuer has suggested investing 10% in liquid assets, we assume that under normal circumstances a maximum of 10% of cash could be lost were a counterparty to default.”

It noted that for S&P to give full benefit to liquid assets they must be eligible investments under its counterparty criteria, and that if other assets are included the rating agency would apply a haircut to reflect the stressed market value of such assets.

“Generally, Finnish covered bonds are also eligible to be pledged with the national central bank for repurchase agreement transactions,” said S&P. “To ease liquidity requirements, the issuer currently plans to mainly issue smaller-sized issuances; it does not intend to issue bonds sized above Eu150m.

“Due to the transaction account risk being mitigated by the inclusion of a liquid asset facility, we intend to conduct close surveillance on the liquidity holdings of the cover pool.”

The initial cover pool comprises typically amortising mortgage loans with a maximum maturity of 30 years, denominated in euros, with each mortgage originated within the Ålandsbanken branch network, said S&P.

It noted that the bank’s stated strategic focus on high-net-worth customers means that the loan sizes have a barbell distribution, i.e. a relatively high proportion of the loans are above-average in size.

“Given that the issuer continues to focus on its geographical heartland of the Åland Islands,” added S&P, “a large proportion (22.6%) of the loans in the cover pool are secured on properties on the Åland Islands. That said, a relatively small proportion, just 1.7%, of the total cover pool comprises mortgages on summer houses.”

It said that it has not penalised the cover pool for this geographic concentration because the islands are relatively wealthy and the region’s economic performance has been stable.

According to S&P Ålandsbanken continues to originate loans into the cover pool but as it is the largest retail bank on the Åland Islands the rating agency expects many of the new loans to be originated on the Finnish mainland.

“That said, although we expect the percentage of mortgage loans on Aaland to decrease, we consider the cover pool to be an established cover pool and do not expect the issuer to materially change the current credit composition of the cover pool,” it added.