The implementation of BRRD in Norway could have a positive impact on Norwegian covered bond ratings, Standard & Poor’s said yesterday (Wednesday), with proposed rules allowing for lower OC requirements and potentially an upgrade of one programme to triple-A.

In October the Norwegian government presented a draft law that proposes changes to financial legislation to introduce rules in line with the EU’s Bank Recovery & Resolution Directive (BRRD).

According to S&P, the BRRD was generally considered to have been formulated in a way that is incompatible with current Norwegian legislation and rules on solvency failure and public administration, but the draft law proposes a fully implemented bail-in regime that would be compatible with the Norwegian Creditors Recovery Act.

In line with the treatment of covered bonds and other debt instruments under the BRRD, the proposed Norwegian regime would provide Norway’s regulators with powers to write down or convert certain debt types in the event of an issuer resolution, with covered bonds and receivables for derivatives included in the cover pool exempt from bail in.

S&P said that if it were to consider the BRRD to be fully implemented in Norway, it would likely require lower levels of overcollateralisation (OC) for its covered bond ratings, due to the additional uplift assigned to the reference rating level (RRL) under its covered bond criteria.

S&P already deems the systemic importance of covered bonds in Norway to be very strong, which allows in the event of BRRD being fully implemented for an additional two notches of uplift from the adjusted issuer credit rating (ICR), with the ICR adjusted to remove any notch of government support. DNB is the only Norwegian issuer for which S&P currently incorporates government support into its ICR.

“If we consider the BRRD to be fully implemented, we would, in accordance with our criteria, remove any uplift from government support and add two additional notches of uplift due to protection from the implemented BRRD,” said the rating agency. “This reflects the additional protection the BRRD provides to covered bonds from the insolvency of the issuer.

“We expect that all issuers will achieve additional unused notches of uplift if the final law reflects the BRRD.”

S&P said that any additional notches achieved will increase the number of unused notches for each covered bond programme and therefore reduce credit enhancement levels for the current ratings, reflecting that issuers will need to cover less of the full market risk as represented by the full target credit enhancement (TCE) to achieve certain ratings.

If the law is implemented as currently proposed, S&P said the covered bond rating of Eiendomskreditt could be raised from AA+ to AAA. The other Norwegian covered bond programmes S&P rates – those of DNB, Storebrand and Gjensidige – are already triple-A.

S&P added that even though the draft law closely resembles the BRRD, it expects extensive work to continue before the law is implemented, with the law yet to be agreed upon in parliament. It said that the final version may differ from current proposals because of discrepancies between the principles of the BRRD and Norwegian law.

“Given the complexity of the extensive proposal, we expect the Ministry of Finance to take its time and believe the earliest potential date for coming into effect will be at the beginning of 2018,” the rating agency said. “However, no formal timeline or deadline has been communicated to date.

“We will continue to follow the legal developments and consider them in our analysis of Norwegian covered bonds.”

Photo: Norwegian parliament; Source: Magnus Fröderberg/Wikimedia Commons