Agencies : Extension of our coverage universe to KommuneKredit

Created in 1899, KommuneKredit was established by a special Act (Act No. 35 of 19 March 1898) as an Association (membership organization) under Danish law. As a local government funding agency, KommuneKredit’s mission is mainly to provide loans (but also financial leasing) to the Danish local sector and entities benefitting from a 100% local government guarantee. Its lending activity is entirely based on its access to the capital markets. All the Danish municipalitie s are members of KommuneKredit. T he membership is on voluntary basis and is restri cted to Danish local governments. Its ratings are Aaa /AAA by respectively Moody’s and S&P, thus in line with the Kingdom of Denmark’s ratings. KommuneKredit’s bonds benefit from unconditional and irrevocable guarantee by the members of KommuneKredit. This means that an explicit guarantee from the whole Danish local government sector is given to the bondholders. The strength of the explicit guarantee from the members is based on the unlimited right of the Danish local sector to levy taxes on personal income and property . Since KommuneKredit is a non-profit organization, earnings arise from the mark-up, though limited, achieved on the lending side and the gains from the liquidity portfolio. The net result is allocated to capital and reserves to reinforce the capital structure of the agency . In 2017, the net result amounted to eq.€66m, in line with 2016, based on a decrease in the net interest income (-3% yoy to €85m) which was offset by non-recurrent item of positive value adjustments on financial instruments (+31% yoy to eq.€16m) . KommuneKredit’s main source funding is the capital bond markets. Currency and product diversification allows the issuer to reach a wider investor base and to minimize the dependence on specific sources of funding in order to ensure competitive funding. On the euro market, the issuer has started to build a liquid curve in 2015 and has since been adding around three new euro bond references per year. Regarding 2018, the funding programme of KommuneKredit is expected to remain stable, bet ween €6bn and €8bn. In our view, KommuneKredit represents a very attractive alternative to its peer group and globally compared to European agencies given its fundamentals (best credit ratings possible, explicit guarantee from the Danish local authorities), its regulatory treatments and its interesting pick-up vs other agencies and govies . Besides, as most of the Nordics agencies, KommuneKredit is not eligible to the PSPP, which may also represent a factor to be considered in the ECB’s quantitative easing tapering context.