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Scope places Dexia Kommunalbank’s public-sector covered bonds under review for possible downgrade

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Scope places Dexia Kommunalbank's public-sector covered bonds under review for possible downgrade

 A gradual reduction in the available supporting overcollateralisation, along with a lack of explicit commitment to maintaining minimum overcollateralisation above legal levels going forward, may negatively affect the rating.
Rating Action

Scope Ratings has today placed its AA- rating on the public-sector covered bonds (Öffentliche Pfandbriefe) of Dexia Kommunalbank Deutschland GmbH (DKD) under review for possible downgrade.

Rating Rationale

Supporting overcollateralisation dropped and lacking guidance on sustainable levels

This rating action reflects a drop in supporting overcollateralisation (oc) to 4.3% from 7.6%, below a level supporting the current one-notch uplift factored by Scope into the ratings. It also reflects the absence of capital market communication regarding the levels DKD expects to maintain in its covered bond programme. Scope will resolve the review as soon as practical, by considering any additional information available following discussions with the issuer.

DKD’s covered bond ratings continue to benefit from fundamental credit support factors. These factors include: i) the credit quality of the issuer; and ii) the five-notch fundamental credit support applicable to German public-sector covered bonds issued by DKD.

Cover-pool quality has improved while asset-liability mismatch risk remains high

The overall credit profile of the cover pool has improved when measured by weighted average default risk, but portfolio concentration has increased. By 31 March 2018, DKD had removed Italian, Portuguese and some other international government and sub-sovereign exposures from the cover pool. The transferred assets were part of a portfolio sale to its 100% parent Dexia Credit Locale S.A. (DCL), with the aim of improving the financial position of the bank and reducing concentration risk on non-domestic exposures.

The portfolio changes have resulted in an improvement in the cover pool’s credit quality which Scope assesses, on average, as ‘aa-‘. The cover pool now comprises predominantly German public-sector exposures – with a significant concentration (72.8%) on the top 20 exposures, making credit performance susceptible to single name risk.

Based on scheduled maturities, the covered bond programme remains materially exposed to asset-liability mismatch risk. In a stand-alone scenario, cumulative shortfalls could amount up to EUR 2.6bn.

Assuming the sale of cover assets to mitigate such mismatches, additional cover pool support could no longer be incorporated in the available oc, amounting to 5.2% on a regulatory basis as of 31 March 2018 (equal to 4.3% if the face value of zero bonds is considered). This compares to 8.3% as of 31 December 2017 and similar levels before that. Further, the bank has removed statements on the adequacy of provided oc from its annual report. Scope has also analysed the development of the cover pool on a forward-looking basis, and expects ongoing volatility in the level of supporting oc.

At present, regulatory requirements mitigate existing short-term liquidity risk as the maximum cumulative shortfalls within the next 180 days need to be covered by highly liquid assets. Furthermore, as long as DKD has not been placed under a moratorium, medium-term liquidity risk is mitigated by a significant amount of cover pool assets which the bank could use for European Central Bank repo funding. Lastly, Scope notes that DKD benefits from a legally binding commitment from its parent DCL to make up any liquidity shortfalls.

Quantitative analysis and key assumptions

Scope determined the default distribution for DKD’s public sector pool using a Monte Carlo analysis. In the simulation, we use the individual exposures’ credit quality and apply a correlation framework. Our asset correlations consider a global correlation factor to which we add sector-specific factors reflecting differing transfer mechanisms, oversight and guarantee structures. Applied correlation assumptions range from 30% to 35%. We also consider concentration risk by adding an additional correlation stress for large obligors, namely those exceeding 1%. Scope has made asset per asset default and recovery assumptions, which result in a weighted average default risk equivalent to aa- rating, as well as a weighted average recovery rate of 72% in the rating relevant stress scenario. The resulting non-parametric distribution has a mean default rate of 0.72% with a coefficient of variance of about 283%.

The cash flow analysis incorporates the credit assumption to which we added market and refinancing stresses. We determined that the program is most sensitive to a non-reverting and increasing interest rate development to 10%. Identified foreign exchange risk sensitivities resulted in a depreciation of JPY, SEK and USD denominated cover assets against the EUR denominated covered bonds. Scope assumed currency depreciation stresses up to 77.5%, 35.0% and 88.0% respectively. The agency has also applied an average refinancing spread of 216 bps and a servicing fee of 10 bps. The cash flow analysis is most sensitive against a low prepayment stress (0%).

Rating-change drivers

During the review, Scope will discuss with the issuer its oc management plans going forward and the extent to which investors can rely on oc levels over and above the regulatory minimum requirement of 2%. In the absence of sufficient comfort regarding supporting oc commensurate with the AA- rating, Scope’s rating may be downgraded by one notch.

A reduction of asset-liability mismatch risk or an increase in oc will only result in a maintenance of the current rating, if accompanied by additional public guidance on sustainable oc or risk levels as per above.

Further details, on both Scope’s credit view on the issuer and the fundamental credit support factors for DKD’s public-sector covered bonds, are provided in the 2016 rating report.

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 1

By Ahmad Ghaddar

LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.

Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.

“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.

Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.

While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.

(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies

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Analysis: Carmakers wake up to new pecking order as chip crunch intensifies 2

By Douglas Busvine and Christoph Steitz

BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.

Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.

The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.

“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”

Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.

In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.

That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.

“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.

“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”

LOW-TECH CUSTOMER

The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.

Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.

“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.

Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.

No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.

Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.

“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.

“What they didn’t understand is that we have been running a night shift since the beginning.”

NO QUICK FIX

While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.

Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.

Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.

But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.

That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.

Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.

The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.

“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.

(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)

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Aussie and sterling hit multi-year highs on recovery bets

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Aussie and sterling hit multi-year highs on recovery bets 3

By Tommy Wilkes

LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.

The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.

On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.

The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.

The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.

Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.

Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.

The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.

Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.

“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.

ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.

They see the greenback index trading down to the 90.10 to 91.05 range.

U.S. dollar

Aussie and sterling hit multi-year highs on recovery bets 4

The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.

The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.

(Editing by Hugh Lawson and Pravin Char)

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