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Rating Action:

Moody's affirms senior unsecured ratings of Kommunalbanken and SEK

16 Jun 2015

London, 16 June 2015 -- Moody's Investors Service has today affirmed Kommunalbanken AS's long-term issuer and senior unsecured ratings at Aaa and downgraded its subordinated debt rating to Aa3 from Aa1. Moody's has also assigned Aaa(cr)/Prime-1(cr) long- and short-term Counterparty Risk Assessments (CR Assessments) to Kommunalbanken in line with the rating agency's revised bank rating methodology.

Moody's has also affirmed Swedish Export Credit Corporation's (SEK) long-term issuer and senior unsecured ratings at Aa1, and downgraded SEK's subordinated debt rating to A1 from Aa2 and its junior subordinated MTN rating to (P)A2 from (P)Aa3. Moody's has downgraded SEK's baseline credit assessment (BCA) to a1 from aa3, and assigned Aa1(cr)/Prime-1(cr) long and short-term CR Assessments to SEK, in line with the rating agency's revised bank rating methodology.

Moody's has withdrawn the outlooks on all junior instrument ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com. Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and issuer/senior unsecured debt ratings.

Refer to the end of this press release for a full list of today's rating actions.

Please click this link for Moody's new bank rating methodology, published on 16 March 2015: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_320662, and methodology for rating Government-Related Issuers, published 30 October 2014: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_173845.

RATINGS RATIONALE

The affirmation of Kommunalbanken's and SEK's senior ratings is based on (1) their standalone BCAs of a1, respectively, which reflect their standalone risks profiles, centred around their public sector related lending mandates; (2) the protection offered to senior creditors, as captured by Moody's Advanced Loss Given Failure (LGF) liability analysis, reflecting the benefit of instrument volume and subordination protecting creditors from losses in the event of resolution, translating into 2 notches uplift from the BCA; and (3) Moody's assessment of government support, which translates into two notches rating uplift for Kommunalbanken and one notch for SEK.

--- KOMMUNALBANKEN

The following factors support Kommunalbanken's Aaa Stable long-term ratings: (1) the "Very Strong -" macro profile or Norway (Aaa stable); (2) the low-risk lending to Norwegian regional and local governments (RLGs); (3) the sizable cushion of bail-in eligible liabilities; and (4) the very high likelihood of government support from the Norwegian sovereign, in case of need.

(1) VERY STRONG MACRO PROFILE

Kommunalbanken lends to RLGs in Norway, a country with very high economic and institutional strength, combined with very low susceptibility to event risk. While Moody's views competition levels in the financial sector as a positive, Norway's macro profile also factors in challenges related to an indebted household sector and financial institutions' extensive use of market funding.

(2) LOW-RISK RLG LENDING

Credit risk arising from Kommunalbanken's lending activities is exclusively tied to Norwegian RLGs that have never defaulted on their obligations, as their financial strength is ultimately tied to the sovereign, as is the case for Sweden's and Denmark's municipal lenders. Kommunalbanken also benefits from being fully state-owned. The lender's capital position is determined through the sovereign's budgetary process, which has resulted in capital injections to enable increased lending to the RLG sector. This is counterbalanced by Kommunalbanken's focus on market funding, exposing it to swings in investor sentiment. This risk is, however, mitigated by a sizable portfolio of liquid assets which the bank reported at 42% of total outstanding senior debt at end-March 2015.

(3) LIABILITIES ELIGIBLE FOR BAIL-IN PROTECT SENIOR CREDITORS

The affirmation of Kommunalbanken's ratings factors in a sizable amount of liabilities eligible for bail-in, assuming a currently unlikely stress-scenario, under Moody's Advanced LGF analysis. All debt instruments issued by the institution are bail-in-able, which ensures a very low loss given failure for the institutions senior unsecured debt, translating into a two-notch rating uplift from the a1 adjusted BCA.

(4) LIKELY SUPPORT FROM THE SOVEREIGN

Kommunalbanken, which is 100% state-owned, benefits from a public policy mandate to lend to RLGs at advantageous interest rates, thus allowing the RLGs to invest in order to deliver key public services such as education and care for the elderly. In addition, Kommunalbanken's capital position is determined by the sovereign, which has publicly voiced its support for the institution. As a result, the Aaa issuer and senior unsecured ratings incorporate two notches of government support uplift, given Moody's assessment of a very high likelihood of support.

--- SEK

The affirmation of SEK's ratings reflects (1) the "Strong+" macro profile reflecting the institution's international lending scope; (2) risk mitigants related to SEK's diverse lending; (3) a sizable cushion of bail-in eligible liabilities; and (4) the likelihood of government support from the Swedish sovereign, in case of need.

(1) "STRONG+" MACRO PROFILE

SEK's Strong+ macro profile reflects the institution's international footprint, as Sweden's export credit agency. Around half of its income originates from customers in Sweden, around a quarter is related to other countries in the European Union and the remainder is represented by countries all over the world. SEK's macro profile reflects the average of the above geographies.

(2) DIVERSE LENDING

SEK supports the Swedish export sector by (1) lending to Swedish companies that export products and services; and (2) lending to foreign buyers of Swedish exports. Moody's considers SEK's lending as diversified because Swedish companies operate globally. Credit risk is further mitigated as SEK benefits from guarantees, often backed by sovereign-linked export credit agencies. These guarantees amounted to approximately half of SEK's net exposure at 31 March 2015. In addition, some lending is guaranteed by international banks instead of export credit agencies. Above said, through its operations, SEK generally assumes higher credit risk than other Nordic public sector lenders, many of which focus exclusively on RLGs. This is reflected by SEK's problem loans ratio which, although it fell to 0.18% at year-end 2014, hovered around 1.6% in 2010-2012. Whilst SEK's risk-appetite is low, it has a for-profit mandate, targeting a return of equity of at least 6%, which lends itself to limited risk taking. On balance, SEK's stand-alone strength, measured by the a1 BCA, is in line with publicly owned peers including Kommunalbanken, Municipality Finance in addition to Netherlands based Bank Nederlandse Gemeenten N.V and Nederlandse Waterschapsbank N.V.

(3) LIABILITIES ELIGIBLE FOR BAIL-IN PROTECT SENIOR CREDITORS

The affirmation of SEK's senior unsecured ratings further factors in a sizable amount of liabilities eligible for bail-in, assuming a currently unlikely stress-scenario, under Moody's Advanced LGF analysis. All debt instruments issued by the institution are bail-in-able and this translates into a two-notch rating uplift from the a1 adjusted BCA.

(4) LIKELIHOOD OF SUPPORT FROM THE SOVEREIGN

SEK, which is 100% state-owned, benefits from a public policy mandate to act as Sweden's export credit agency. In addition, amidst the financial crisis in 2009, the government took precautionary measures by (1) injecting SEK5 billion into SEK; (2) extending a SEK100 billion credit facility to SEK; and (3) allowing SEK to purchase state guarantees for up to SEK450 billion (total liabilities were SEK358 billion at year end-2009). These actions, taken by the government, specifically in order to facilitate increased lending (SEK did not experience distress at the time), support our assessment of a high likelihood of government support for SEK's senior unsecured creditors, resulting in one notch of government support uplift in the institutions' Aa1 issuer and senior unsecured ratings.

OUTLOOKS

The outlooks on Kommunalbanken and SEK are stable, reflecting the stability in Moody's expectations of these institutions' performance metrics.

DOWNGRADES OF SUBORDINATED DEBT

Moody's has downgraded Kommunalbanken's subordinated debt to Aa3 from Aa1 as the likely implementation of a resolution regime in Norway has led to a partial reduction of the rating agency's assessment of the likelihood of government support for the institution's subordinated creditors. Nevertheless, Moody's still considers Kommunalbanken's subordinated debt to continue to benefit from a "high" level of government support given (1) the bank's public policy mandate; (2) its close links to the Norwegian government through full ownership; and (3) Norway's non-European Union membership, which gives the government more flexibility in a currently unlikely stress-scenario compared to peers within the EU.

Moody's has downgraded SEK's subordinated debt to A1 from Aa2 and its junior subordinated debt to A2 from Aa3. This reflects Moody's assessment that the implementation of the Bank Recovery and Resolution Directive in Sweden will translate into reduced flexibility for the government to support SEK's subordinated creditors, in a - currently unlikely -- resolution scenario.

ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS

Moody's has assigned Aaa(cr)/Prime-1(cr) long and short-term CR Assessments to Kommunalbanken and Aa1(cr)/Prime-1(cr) long- and short-term CR Assessments to SEK. CR Assessments are opinions of how counterparty obligations are likely to be treated if an institution fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a institution's contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of an institution should it enter a resolution.

For Kommunalbanken and SEK, the CR Assessments are positioned, prior to government support, three notches above the institutions' Adjusted BCAs, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main difference with Moody's Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore Moody's focus purely on subordination and take no account of the volume of the instrument class.

For Kommunalbanken, the CR Assessment also benefit from government support in line with Moody's support assumptions on deposits and senior unsecured debt. This reflects Moody's view that any support provided by governmental authorities to an institution which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with Moody's belief that governments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Kommunalbanken's ratings could come under pressure as a result of (1) weaker asset quality, which Moody's considers currently unlikely; (2) a dilution of its public policy mandate; (3) a weaker position in the debt capital markets; (4) sustained weaker financial performance; and/or (5) a lower likelihood of government support.

SEK's ratings could come under pressure as a result of (1) a dilution of its policy mandate to act as Sweden's export credit agency; (2) volatile asset performance that erodes SEK's capital base; (3) a weaker standing in debt capital markets; (4) weaker profitability over an extended period; and/or (5) a lower likelihood of government support.

The principal methodologies used in these ratings were Banks published in March 2015 and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Issuer: Kommunalbanken AS

.... Adjusted Baseline Credit Assessment , Affirmed a1

.... Baseline Credit Assessment , Affirmed a1

.....Long-Term Issuer Rating , Affirmed Aaa Stable

.....Senior Unsecured Regular Bond/Debenture, Affirmed Aaa Stable

.....Subordinate Regular Bond/Debenture, Downgraded to Aa3 from Aa1 Ratings Under Review

.....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aaa

.....Subordinate Medium-Term Note Program, Downgraded to (P)Aa3 from (P)Aa1

.....Short-Term Medium-Term Note Program, Affirmed (P)P-1

.....Short-Term Commercial Paper, Affirmed P-1

.... Counterparty Risk Assessment , Assigned Aaa(cr)

.... Counterparty Risk Assessment , Assigned P-1(cr)

....Outlook, Stable

Issuer: Swedish Export Credit Corporation

.... Adjusted Baseline Credit Assessment , Downgraded to a1 from aa3

.... Baseline Credit Assessment , Downgraded to a1 from aa3

.... Long-Term Issuer Rating , Affirmed Aa1 Stable

.....Senior Unsecured Regular Bond/Debenture, Affirmed Aa1 Stable

.....Subordinate Regular Bond/Debenture, Downgraded to A1 from Aa2 Ratings Under Review

.....Senior Unsecured Shelf, Affirmed (P)Aa1

.....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa1

.....Subordinate Medium-Term Note Program, Downgraded to (P)A1 from (P)Aa2

.....Junior Subordinate Medium-Term Note Program, Downgraded to (P)A2 from (P)Aa3

.... Short-Term Commercial Paper , Affirmed P-1

.....Short-Term Medium-Term Note Program, Affirmed (P)P-1

.... Counterparty Risk Assessment , Assigned Aa1(cr)

.... Counterparty Risk Assessment , Assigned P-1(cr)

....Outlook, Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jan Skogberg
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms senior unsecured ratings of Kommunalbanken and SEK
No Related Data.
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