Paris, February 07, 2006 -- Moody's Investors Service has today assigned a provisional rating of (P)Aaa to the proposed first issuance of Icelandic Covered Bonds by Kaupthing Bank HF ("Kaupthing"). This is the first issuance under the ISK  Billion Icelandic Covered Bond programme of Kaupthing.
The first issuance is expected to be up to ISK  Billion and will concern two series of fixed-rate bonds with a legal final maturity in 2033 and 2048 respectively.
The provisional rating addresses the expected loss posed to investors by the legal final maturity. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.
The Icelandic Covered Bonds are bonds issued directly by Kaupthing (A1, Prime-1, C+), and benefit from the security provided by a pool of Icelandic residential housing loans (the "Cover Pool"). The programme has been structured using securitization techniques to ring fence the Cover Pool in the unlikely event of an insolvency of Kaupthing.
The programme has been established under general Icelandic law unlike many other European covered bonds which rely on specific legislation. The Icelandic law is regarded as a relatively creditor-friendly legal framework which enables Kaupthing to create a structured covered bond with similar characteristics to other covered bonds found across Europe.
Over and above a number of provisions found in many covered bond frameworks, Kaupthing has incorporated a number of structural enhancements into this programme to achieve the (P)Aaa rating. Moody's believes that the use of structural techniques could have credit advantages. For example, the structural techniques used include provisions to maintain the credit quality of the Cover Pool and to mitigate risks to the transaction associated with a credit deterioration of various counterparties.
A further benefit is the "pass through" structure adopted. Prior to acceleration this limits the exposure of the Covered Bonds to refinancing risk and market risks. Prior to acceleration, all payments and prepayments (interest, principal and indexation amounts) received from the loans are used to repay the matching obligations on the Covered Bonds preventing any mismatch in duration, interest or principal. The Covered Bonds do not have any pre-set repayment schedule.
Moody's issues provisional ratings in advance of the final sale of securities, and these ratings only represent Moody's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavour to assign a definitive rating to the Covered Bonds.