Boligkreditt

The operating relationship with parent banks

SpareBank 1 Boligkreditt (Spabol or the Company) was founded in 2005 and issued its first Euro benchmark in September 2007, a 1 billion, 3 year covered bond. 2017 is the 10th year of issuing covered bonds and Spabol is an important source of funding for the banks in the SpareBank 1 Alliance. On average 1/3 of all residential mortgage lending from the SpareBank 1 Alliance banks in Norway has been funded via Spabol covered bond issuance. The banks sell originated loans which meet a series of quality checks to SpareBank 1 Boligkreditt’s cover pool.

The relationship between covered bond issuer and banks are regulated by Norwegian law, but also by contract between Spabol and each bank. This is a source of the cover pool’s credit risk strength and diversification. The law requires that a special entity, separate from the parent institution(s) issues cover bonds. The main objective of this feature of the law is to segregate the assets over which investors in covered bonds and pari passu counterparties in hedging swap contracts have a first priority right in case of insolvency, second it provides for a simple, transparent balance sheet. The contractual arrangements are such that the parent banks are obligated to support the cover pool in times of stress and emergencies with additional equity (above paid in equity for regulatory capital adequacy purposes) and liquidity. Additionally, and more relevant for ongoing operations, parent banks need to maintain reserves of mortgages for the cover pool, in case LTVs in the pool increase due to valuation declines in the housing market. In the Alliance, reserves are calibrated so that the Company’s cover pool can withstand sudden house price declines of 30 per cent. The cover pool, however, is continuously extremely robust due to the process of qualification that each mortgage goes through in order to be eligible for the pool. This means that customer credit scores, customers past behavior, as well as income and loan metrics and correctness of documentation and registration determine the share of mortgages that qualify for the cover pool. With reference to the 1/3 of Alliance banks’ mortgages financed through the pool, another approximately 30 per cent of loans are pre-qualified, but not transferred (or sold) from the banks.

Ownership

Ownership is tied to the relative volume of mortgages. Because covered bond entities in Norway are credit institutions, the same capital requirements apply as to all banks in general. A transfer (a sale) of mortgages to the cover pool therefore requires an equity injection. Through the year, mortgages continue to be sold to the pool, and equity is raised from the Alliance banks at irregular intervals. At the end of each year, ownership shares are reset depending on the then prevailing relative positons of the banks with regards to mortgage volume in the cover pool. At year-end 2016, the equity shares of the banks were:

The ownership shares determine the pro rata and joint obligations of the banks. As mentioned above, a shareholders agreement provide for additional equity contributions to be made in case of sufficient impairments in the cover pool while a shareholders note purchasing agreement regulates when the banks themselves will need to buy covered bonds from Spabol. Neither the covered bond issuer nor the banks expect that any of these agreements would ever be drawn upon. In fact they were constructed to formalize and exhibit the strong cohesion between Spabol and the banks which exists anyway. Each bank is obligated to perform its share of each agreement’s commitment based on its pro rata equity share in Spabol, details of the agreement are in the SpareBank 1 Boligkreditt Prospectus document. Furthermore, in case of other Alliance banks being unable to participate under either agreement at the point of draw down, each bank is additionally taking on the commitment of its pro rata share a second time.