Moody’s Corporation (NYSE:MCO) on Danske Bank and other Danish Banks. (Okay! We are not surprised)
What can past market crashes teach us about the current one?
The markets have largely recovered since the March selloff, but most would agree we're not out of the woods yet. The COVID-19 pandemic isn't close to being over, so it seems that volatility is here to stay, at least until the pandemic becomes less severe. Q2 2020 hedge fund letters, conferences and more At the Read More
“The magnitude of some of today’s downgrades reflects a range of concerns, including the risk that some institutions’ concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody’s central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment – and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors – today’s rating actions reflect the view that these risks have increased.”
1. A difficult operating environment, weakening asset quality and low profitability. Danish financial institutions face sluggish domestic economic growth, weakening real estate prices and higher levels of unemployment, as well as the risk of external shocks from the ongoing euro area debt crisis. Asset quality is deteriorating, and these pressures are expected to continue, exacerbated by
i) the junior-lien status of most mortgages in the loan books of Danish banks, and
ii) for specialised lenders, their concentrated exposure to certain sectors which leave them vulnerable to sector downturns. Further, Danish financial institutions’ weak profitability limits their ability to absorb losses in this environment.
2. Substantial market-funding reliance of most financial institutions increases vulnerability. Most market funds are in the form of covered bonds which have historically been a stable funding source. But structural changes to that market have increased refinancing risk, posing a particular concern for mortgage credit institutions whose access to alternative funding is limited.
Comment: I told you so…..
BLUE= One notch down
GREEN= Two notches down
RED= Three notches down
Today’s changes to issuers’ senior ratings can be summarized as follows:
1. Danske Bank (deposit rating Baa1, standalone bank financial strength rating (BFSR) C- / baseline credit assessment (BCA) baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1. Danske’s Finnish subsidiary Sampo Bank (deposits A2; BFSR C- / BCA baa1) was downgraded by one notch.
2. Jyske Bank (deposits Baa1; BFSR C- / BCA baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1.
3. Sydbank (deposits Baa1; BFSR C- / BCA baa2) was downgraded by two notches, and its short-term rating downgraded to P-2 from P-1.
4. Spar Nord Bank (deposits Baa3; BFSR D+ / BCA baa3) was downgraded by one notch. The bank’s short-term rating was downgraded to P-3 from P-2.
5. Ringkjobing Landbobank (deposits Baa1; BFSR C- / BCA baa1) was downgraded by one notch. The bank’s P-2 short-term rating was affirmed.
– SPECIALISED CREDIT INSTITUTIONS
1. Nykredit Realkredit (issuer rating Baa2) was downgraded by three notches. Its subsidiary Nykredit Bank (deposits Baa2; BFSR D+ / BCA baa3) was downgraded by three notches. Short-term ratings for both institutions were downgraded to P-2 from P-1.
2. DLR Kredit (issuer rating Ba1) was downgraded by three notches.
3. Danmarks Skibskredit (issuer rating Baa2) was downgraded by three notches.
The Aaa ratings on government guaranteed debt issued by these institutions are not affected by today’s rating actions.
Comment: Danish real estate bonds are now junk. Some of the banks are subjunk.