Standard & Poor’s has assigned a AAA rating to ROs issued out of Nykredit Realkredit’s capital centre G, which have a Aa3 rating, on review for downgrade, from Moody’s. The ROs are used to finance high loan-to-value lending under a two tier funding model.

Under Nykredit’s new model, it will finance first ranking mortgage loans up to 60% LTVs through særligt dækkede obligationer (SDOs) and second ranking mortgage loans up to 80% through realkreditobligationer (ROs) issued out of capital centre G.

“Nykredit Realkredit’s SDOs and ROs mainly differ in the regulatory requirement to revalue the collateral on an ongoing basis, and eventually post additional overcollateralization if the collateral registered for the SDOs experiences market value declines,” said S&P when announcing the rating on Friday. “We understand that ROs do not have this requirement and thus will also attract different risk weightings.

“Further, we would expect our ratings on the ROs issued out of Capital Centre G to be more reliant on the active management of the overcollateralization level necessary to support the currently assigned ratings.”

S&P said that the issuer has stated that it intends to maintain the AAA rating and hence a level of overcollateralisation commensurate with that rating.

Capital centre G was established in 2009 and has so far been used to finance what S&P describes as commercial mortgages, although Nykredit will increasingly use it to refinance retail mortgages.

The programme is assigned to Category 1 under S&P’s methodology and has been given an asset-liability mismatch (ALMM) score of “low”, meaning that it can potentially achieve an uplift of seven notches over the issuer credit rating. S&P set a target credit enhancement of 19.13% in order for the maximum uplift to be achieved and OC as of 31 December 2011 was 23.35%.

The AAA rating from S&P compares with Aa3, on review for downgrade from Moody’s.

Analysts at Nykredit Markets said that the S&P AAA rating should have a positive pricing impact on the “second tier” ROs, even if their risk weighting, of 20%, is higher than the 10% of SDOs. They said that negative effects resulting from higher supply could be counteracted by greater liquidity, while their AAA rating would have technical implications.

“The AAA rating eliminates the difference between SDOs and RO2Ls [the capital centre G ROs] in the determination of capital requirements of pension funds under Solvency II, as RO2Ls fulfil the covered bond definition laid down in Ucits 54(4),” said the analysts. “This requires that Moody’s lower rating of Capital Centre G is disregarded, but since both RD [Realkredit Danmark] and BRF have changed from Moody’s to S&P, the Life & Pension sector will probably apply S&P’s ratings as the sector rating of the Danish mortgage sector.”

Nykredit’s analysts said that the RO2Ls should trade at a spread of 10bp-20bp versus SDOs, compared with a current spread of 35bp.