Eksportfinans rating cut preceded by widening CDS spreads, analyst says; issuer still among least risky

By Kenneth Lim

Boston, Dec. 19 - Eksportfinans ASA's credit rating cut by Moody's Investors Service is not a significant deterioration for the issuer's relatively strong standing, said structured product analyst Suzi Hampson of Future Value Consultants.

Moody's on Dec. 16 downgraded Eksportfinans's long-term issuer and debt ratings to Aa1 from Aaa with negative outlook, but affirmed its Prime-1 short-term rating.

The credit rating agency cited Eksportfinans's continued losses and its weakened position as a loan provider to Norwegian local government as indicators of weakened financial strength and earnings power. The Oslo-based export lending institution's plan to sell its local lending business to focus on export lending will also increase earnings volatility, hence the negative outlook, Moody's said.

In a press release, Eksportfinans said the downgrade was unexpected. The institution noted that it had strong support from the Norwegian government, which is a shareholder along with Norwegian banks, and that it had taken steps such as a portfolio hedge to address volatility concerns.

CDS spreads already wider

Eksportfinans, one of the largest third-party issuers of structured products in the United States, had already seen its credit default swap spreads widen before the Moody's cut, Hampson said.

"We actually look at CDS levels rather than credit ratings themselves because we found in the last six months that ratings were not quick enough to react to changes," she said. "The CDS of Eksportfinans have gone up in the last month, but it's still one of the lower issuers...actually, it's still lower than the investment banks. It was around 30 basis points about a month ago, it's coming up to about 60 bps now. It's obviously quite a big increase, but compared to other issuers it's not high."

Relative risk still low

Because Eksportfinans is still largely seen as one of the safer issuers in the market, even after the ratings cut, its new rating is unlikely to be a major setback, Hampson added.

"It has an effect on the value [of Eksportfinans-issued structured notes], but being quite low, you probably wouldn't see much difference," she said.

Eksportfinans recently priced $61.66 million of zero-coupon basket-linked notes due Jan. 24,

2011 linked to the MSCI EAFE index and iShares MSCI Emerging Markets index fund via Goldman, Sachs & Co.

In the basket, the index has an 80% weight and the fund has a 20% weight.

The payout at maturity will be par plus 150% of any basket gain, subject to a maximum payout of $1,400.50 per $1,000 principal amount. Investors will receive par if the basket declines by 20% or less and will lose 1.25% for every 1% that the basket declines beyond 20%.

Future Value assigned the product a 5.52 overall rating out of a best possible 10. The overall rating takes into consideration the value of the product, which is in turn affected by the issuer default risk. That rating is unlikely to change much with the new credit rating, Hampson said.

"Aa1 is still pretty high," she said.

Terms could sweeten

Eksportfinans may also have to begin offering more attractive terms on its structured products because of the greater perceived risk of default, Hampson said.

"That's what you'd expect," she said. "The funding rate levels are going up, so you'd expect better terms from the issuer...In comparison with maybe a month ago you might get better terms."

But the company's structured products will still be unlikely to come with better terms than most other U.S issuers simply because their default risk is still deemed to be among the lowest, she said.

"Comparatively to other issuers they're still not going to be better," she said. "I don't see why they would stand out because the CDS is still quite low."

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