Fitch upgraded Sandnes Sparebank Boligkreditt covered bonds from AA- to AA yesterday (Monday) because it considers the liquidity of the cover pool has improved, for example as a result of the Norwegian savings bank having added maturity dates to contracts for flexible loans included in the pool.

In terms of Fitch’s rating methodology, the upgrade was triggered by a revision for the better of the Discontinuity Cap (D-Cap), from 3 (“moderate high risk”) to 4 (“moderate risk”).

This reflected changes in the characteristics of the cover pool, according to Fitch, which used to have geographically concentrated loans, a high proportion of flexible loans and non-standard features for the flexible loans, notably a lack of a maturity date. Fitch assumed that this feature would make the loans less palatable to potential buyers of the pool following a default of the issuer.

However, the contracts for all flexible loans in the pool were amended, with borrowers notified and having agreed the amendment, and the loans now have a maturity date 15 years from the origination date, according to Fitch.

“Sandnes Sparebank has also discontinued offering flexible loans without maturity,” said the rating agency. “In addition, the proportion of flexible loans in the cover pool has significantly decreased to 42% at end-September 2013 from 56% (based on drawn amount) at end-March 2013.”

The AA covered bond rating also reflects a BBB issuer default rating of Sandnes Sparebank and updated breakeven overcollateralisation of 11% for the AA rating, down from 12% for the previous AA- rating, which in turn reflects lower asset and liability maturity mismatches.

According to Fitch, Sandnes recently redeemed part of the covered bonds maturing in June 2015 and issued a five year covered bond, which increased the weighted average life (WAL) of the outstanding covered bonds to 2.6 years from two years. On the asset side, Fitch calculated the WAL of the mortgages in the pool as having decreased from 20.8 years to 11.8 years.