Copenhagen, Denmark. Ratings. Contacts. Key Indicators

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1 Credit Opinion: DLR Kredit A/S Global Credit Research - 18 Nov 2009 Copenhagen, Denmark Ratings Category Outlook Issuer Rating Preferred Stock Moody's Rating Negative A3 Baa2 Contacts Analyst Phone Eeva Ketola/London Janne Thomsen/London Simon Harris/London Tom Petersson/London Key Indicators DLR Kredit A/S [1] [2] [3]Avg. Total assets (DKK billion) [4]11.18 Total assets (EUR billion) Total capital (DKK billion) [4]19.88 Return on average assets Recurring earnings power [5] Net interest margin Cost/income ratio (%) Problem loans % gross loans Tier 1 ratio (%) [1] As of September 30. [2] Statement period in which the bank switched to Basel II accounting framework. [3] The average calculations are based on Basel I and Basel II data where applicable. [4] Compound annual growth rate. [5] Preprovision income % average assets. Opinion SUMMARY RATING RATIONALE Moody's assigns an A3 issuer rating to DLR Kredit A/S (DLR). The A3 issuer rating reflects the application of Moody's recently published new methodology for rating financial institutions that specialise in the issuance of covered bonds on behalf of an owner bank or a grouping of banks. This methodology covers DLR, as it is owned by around 100 regional and local banks in Denmark, and the owner banks originate over 95% of DLR's loans, the rest being originated by a few other banks that are not shareholders. These loans are funded by DLR's issuance of covered bonds. DLR's issuer rating is anchored to our rating assessment of the owner banks and their links to DLR in terms of the probability, magnitude and features of parental support. In addition, the rating assessment incorporates as a positive factor the special features of the Danish legal framework for mortgage credit institutions and, in particular, the balance principle, whereby lending and funding are closely matched and therefore liquidity risk is limited. This means that our assessment of parental support concentrates on the magnitude of and any provisions related to support in terms of solvency. We view DLR as a strategically important funding source for its owner banks, particularly in terms of agricultural lending. The largest owners of DLR are Sydbank A/S (A1/C+/P-1) and Jyske Bank A/S (A1/C+/P-1), which held 7.7% and 6.6% of the share capital, respectively, as of the end of Other large owners of DLR rated by Moody's include Spar Nord Bank A/S (A2/C-/P-1) and Ringkjøbing Landbobank A/S (A1/C+/P-1). In all, Moody's rated owner banks of DLR hold around 22% of the entity's share capital. Regarding the non-rated owners, in our view the support measures taken by the Danish government, under Bank Package I and Bank Package II, would likely underpin investment-grade ratings of the Danish banks covered by these schemes, but, at the same time, we note that the measures are temporary. The anchor to DLR's rating reflects the overall strength of the owner banks, but also

2 gives some additional weight to the larger owner banks and our expectation of their ability to support DLR if needed. The support commitment from the owner banks is in the form of guarantees insuring a proportion of the portfolio against possible credit losses. For agricultural lending, the owner banks provide a collective guarantee agreement, whereby the banks cover losses on the agricultural portfolio from 0.25% up to 2.5% per annum (losses above or below this range are at DLR's risk). We note that lending to segments other than agriculture is covered by individual guarantees given by the originating bank - these guarantees cover losses on loans exceeding a certain loan-to-value ratios (LTV) level. At the end of September 2009, more than 93% of DLR's total portfolio was covered by guarantees. We view asset quality guarantees positively, but note that there are some timing issues since they cover realised losses but not provisions. In addition to the guarantees, we understand that there is an undertaking from shareholders to provide some additional capital support over this and next year. Overall, we view the support commitments of the owner banks as beneficial for DLR's rating, but not as providing a full legally binding commitment to ensuring the entity's solvency at all times, which is reflected in the current rating level. After the recent introduction of covered bonds in Denmark, DLR has ceased issuing mortgage bonds, and funding is now provided by a new series of covered bonds, since January The covered bonds in domestic and foreign currency (euros) issued by DLR out of the General Capital Centre and the new Capital Centre B are rated Aa1. The Aa1 rating of DLR's covered bonds additionally reflects Denmark's strong legal framework for covered bonds. Credit Strengths - Regulation by the strict Danish mortgage legal framework - Support from the owner banks in terms of asset quality guarantees - Strategic importance to the owner banks in terms of funding - Well established franchise and significant market shares in agricultural mortgage lending - Improved capital position - High cost efficiency Credit Challenges - Pressure on financial strength of owner banks - Maintaining asset quality across the cycle and weaker outlook for agricultural sector - Maintaining market share in a mature market - Structural development of the Danish agricultural sector - More challenging operating environment in Denmark Rating Outlook The negative outlook on the issuer rating reflects Moody's concerns that the owner banks as well as DLR continue to face challenges in terms of asset quality. We view the agricultural sector in Denmark as one of the more vulnerable segments in the current economic downturn given the significant decrease in the price of farming land, adverse pressure on product prices and the high indebtedness of farmers. It also reflects the fact that deterioration in the financial strength of some of the owner banks could continue beyond the expiry of Bank Package I at end-september What Could Change the Rating - Up A full legally binding commitment from the owners to ensuring adequate solvency at all times could be seen as a positive rating factor. Stronger financial position of the owner banks could be also seen as positive but given the challenging operating environment in Denmark and the expiry of Bank Package I in less than one year's time we do not view this likely in the short-to-medium term. What Could Change the Rating - Down Deterioration in the financial strength of the owner banks or any signs of a weaker commitment to support DLR could be seen as negative factors as well as a significant weakening in the entity's asset quality. In addition, any changes to the strict legal framework governing the Danish mortgage credit institutions could have adverse implications, although we view this as unlikely. Recent Results and Company Events On 9 November 2009, DLR announced that the board of directors had decided to increase capital base by up to DKK600 million in December The full amount would increase the Tier 1 ratio to 11.9% when using the financials as of end-september DLR reported a pre-tax profit of DKK443 million for January-September 2009, compared with a profit of DKK319 million for the same period in The result was positively affected by an increase in net interest income and positive value adjustments and more than compensated for higher loan loss provisions. Lending increased by 6% in the first nine months of 2009.

3 Arrears have increased although they remain still at a low level, totalling DKK285 million at end-september 2009 and accounting for 0.2% of loans (DKK150 million at end-2008). Total loan loss reserve amounted to DKK218 million or 0.2% of loans. The capitalisation of DLR has been improved as a result of the hybrid capital injected by the government in June The total capital and Tier 1 ratios stood at 11.3% at end-september 2009 including the profit for the period. In January 2009, the Danish government announced the support package to the financial sector. The mortgage credit institutions are included in this second package and could benefit from the recapitalisation and the guarantee scheme for supplementary issuances (typically referred to as junior covered bonds). All solvent mortgage credit institutions are eligible to participate in the recapitalisation, which will be in the form of hybrid capital; applications had to be submitted by 30 June DLR obtained a capital injection of DKK 4.8 billion in June In October 2008, Danish authorities agreed to ease the calculation method of future obligations for pension funds to prevent a selloff of mortgage bonds following a decline in prices. In October 2008, the Danish government together with the banking sector announced a guarantee scheme to cover deposits and senior claims of participating banks until 30 September DLR's owner banks, which also provide DLR with loan loss guarantees, are covered by the guarantee, but we note that this is a temporary measure. Franchise Value DLR is currently Denmark's fifth-largest mortgage lender with around a 6% market share of the mortgage loans and a strong niche position in mortgage lending to the agricultural sector. It was originally established by special law as a specialised mortgage lender to the Danish agricultural sector, enjoying a monopoly on extending agricultural mortgages for LTVs from 45% to 70% until In 2000, DLR was brought under the framework of the General Mortgage Law, thus permitting it to extend mortgage loans to other market segments. In 2001, DLR was converted to a limited company from a foundation and, at the same time, extended its activities to include loans for office and business properties, rental and social housing, housing co-operatives as well as manufacturing and manual industries. Over 95% of DLR's loans are originated by its shareholding banks (regional and local banks), which together have more than 1,000 branches evenly spread throughout Denmark. These shareholders provide guarantees to cover part of the losses on DLR's agricultural loan portfolio as well as on loans over certain LTV levels in its other business areas (for more details, see Asset Quality, below). In 2008 DLR held market shares in net lending of 36% for agricultural properties, 11% for private rental housing, including housing co-operatives, and 9% for office and business properties. Agriculture accounts for more than 10% of Danish exports, and over twothirds of Denmark's agricultural production is exported, hence this segment is important for the Danish economy. The majority of agricultural production is concentrated on a decreasing number of large farms. However, Moody's notes that the sector continues to include smaller farms that are often run by "part-time" farmers. Agricultural lending remains the core element of DLR's business (accounting for 65% of the mortgage loans at end-september 2009 compared with 65% at end-2007). The management expects the relative importance of agricultural lending to decrease in the medium-to-long term due to increased lending in new areas. For instance, lending for office and business properties has steadily been increasing, from 10% of the total loan portfolio in 2004 to 16% at end-september At the moment, DLR is in general not offering loans to owner-occupied dwellings since DLR's shareholders (regional and local banks) have an agreement with Totalkredit/Nykredit to distribute their mortgage loans in this segment. Although DLR has been able to maintain its high market share of agricultural lending in recent years, this may prove more difficult in the future given the increasing level of competition from other mortgage lenders. However, this is mitigated by DLR's expansion into other corporate segments and, in turn, these segments also enjoy guarantees from the owner banks. In addition to providing mortgage loans, DLR has managed the loan portfolio of LR Realkredit (majority owned by Nordea, Danske Bank, SEB and Arbejdernes Landsbank) since LR Realkredit provides loans mainly for social and cultural projects as well as subsidised housing. DLR takes no credit risk on this portfolio. Risk Positioning DLR is owned by 97 Danish regional and local banks (108 in 2006) that are also users of its services. It provides loans for the customers of the owner banks in agriculture and other commercial business lines. Shares in DLR are redistributed every third year to reflect the various banks' usage of the mortgage lender. At end-2008, the largest shareholders were Sydbank A/S (A1/P-1/C+) and Jyske Bank A/S (A1/P-1/C+), both holding over 5% of the shares. None of the owner banks holds more than 8% of the shares. We do not see DLR as having corporate governance issues. DLR's annual accounts follow Danish regulations and are issued on a timely basis, although we note that the level of detail is limited in the quarterly results. The accounts are audited by Deloitte. DLR's mortgage loans were funded by mortgage bonds until year-end 2007, but DLR is now funding mortgage loans by a new series of covered bonds (SDOs) following the new Danish legislation. The main difference between mortgage and covered bonds is that the LTVs of the latter must be monitored throughout the lifetime of the loans. Due to the global financial crisis, it has been difficult to sell euro-denominated bonds and therefore most of DLR's issuance in 2008 and so far in 2009 has been in Danish krone. As regards lending activities, DLR has principally no market risk as it adheres to the specific balance principle (i.e. its mortgage and covered bonds mirror the terms of the underlying mortgage loans as regards the nominal amount, coupon and other terms). Regulations for asset-liability management and capital are set out in the legal framework for Danish mortgages and covered bonds.

4 As a result of matching between lending and funding, market risks are related to DLR's securities portfolio. The bond portfolio consists mainly of Danish mortgage bonds, as mortgage regulation requires 60% of the capital requirement to be invested in bonds or deposited in central banks. At end-q1 2009, DLR had an interest-rate risk with a 1% parallel shift of the yield curve of DKK138 million, corresponding to 1.5% of total capital and remains within the 8% limit set by the FSA. DLR's equity exposure and currency risk are negligible. The only equity holdings are related to e-nettet Holding A/S (involved in a project of implementing the electronic land registration) and VP Securities A/S (a securities service), which are unlisted companies and valued at DKK15.7 million on the balance sheet (0.1% of Tier 1 capital). Liquidity risk is calculated - on a daily accumulated and discounted basis for different periods in the future - as the net present value of incoming and outgoing payments connected with issued bonds, future payments, other securities and financial instruments. Future liquidity deficits may not exceed 25% of the mortgage credit institution's equity capital in years one to three. For years four to ten, these deficits are capped at 50% of DLR's equity capital. The cap is 100% from year 11 onwards. Regulatory and Operating Environment Refer to Moody's most recent Banking System Outlook on Denmark. Profitability Trend: Weakening DLR's loan growth has slowed in net lending decreased in Q1-Q3 by 46% from the corresponding period of At end- September 2009, total lending was 6% higher than at the end of We note that a decrease in interest rates has been reflected in re-mortgaging activity, but in general loan growth is slow as a result of the weaker economic outlook. A margin on a mortgage is agreed on a fixed-percentage basis at the start of the mortgage and it often remains the same throughout the life of the loan. This margin (included in net interest income) includes a fee for administering the loan. Depending on market and business conditions, the margin can be adjusted for a part or the whole of the portfolio, although Moody's notes that, given the intense competition and the high level of transparency in the Danish mortgage market, increasing margins could result in a decrease of DLR's market share unless all its competitors make the same increase. DLR pays part of the margin to the originating bank. Irrespective of the interest-rate type, a customer can pre-pay his mortgage loan at any time by purchasing the bonds in the market, or by paying the par value in cash if a callable bond has been used to finance the mortgage loan, hence DLR bears no risk in relation to pre-payments. The mortgage credit institution will receive a pre-payment fee to cover administrative costs in relation to the prepayment. In addition to the margin on the mortgages (mentioned above), DLR's net interest margin stems mainly from its investments of surplus liquidity. DLR applies more stringent investment criteria than those required by Danish mortgage legislation. Its investment portfolio includes investments in its own bonds, other Danish mortgage bonds and Danish government papers, which in general means a relatively low return on the securities portfolio. The net interest margin as a percentage of average earning assets of 0.75% remained stable in comparison to the previous year (0.76% in 2008, 0.80% in 2007 and 0.82% in 2006). The net interest margin is low compared with those of commercial banks, but compares well with those of other Danish mortgage lenders. DLR's risk-adjusted profitability (pre-provision income in relation to risk-weighted assets) was low at 0.7% in January-September 2009, but increased slightly from 0.6% in 2007 and We note that DLR's pre-tax result increased by 40% in January-September 2009 from the same period in 2008 due to increased net interest income and positive value adjustments. As is the case with most other Danish institutions, the transition to IFRS has allowed for a lower level of provisioning compared with the previous Danish accounting regulations. However, given the more challenging economic outlook, write-backs on loan loss provisions have reversed in 2009 and we expect this trend to continue given the more challenging outlook for the agricultural sector. We also note significant interest expenses in relation to the DKK4.8 billion of hybrid capital from the government, which carries a fixed rate of 9.26%. Liquidity As DLR adheres to the balance principle, its lending and funding are almost matched and no new lending takes place if it is not possible to issue covered bonds. It is important to note that DLR's customers receive bonds and therefore any change in market terms will affect the customers. Asset quality is, to a large extent, supported by guarantees from the arranging banks. At end- September 2009, DLR had less than 10% of the balance sheet in liquid assets, mainly in the form of Danish mortgage bonds, which we consider adequate given the nature of its business. Capital Adequacy The capital base of DLR was strengthened in June 2009 when the entity received DKK4.8 billion in hybrid capital from the Danish government under Bank Package II. DLR's capital base currently consists of only Tier 1 capital including DKK5.6 billion in hybrid instrument (48% of total Tier 1 capital as of end-september 2009). The Tier 1 ratio at end-september 2009 was 11.3%. The owners have supported DLR by capital increases, most recently in Q with an increase of DKK500 million. In addition, in November 2009 the board of directors of DLR decided to strengthen the capital base by up to DKK600 million. The full amount would improve the Tier 1 ratio to 11.9% when using the financials as of end-september In relation to the 8% regulatory minimum requirement for the total capital ratio, DLR had excess capital of DKK3.3 billion at end- September % of gross loans.

5 For Basel II purposes, DLR is currently using the standard method for credit risk. At the end of 2007, DLR applied for the Danish FSA's approval of its advanced internal ratings-based (IRB) model for the agricultural portfolios. However, DLR is currently improving the model and at the same time developing a model for the remainder of its loan portfolio. We expect a revised application comprising both models to be delivered to the Danish FSA in For market risk, DLR applies the standard method, and for operational risk the basic indicator method. We expect the IRB approach to reduce the capital requirement, but anticipate that the institution will retain sufficient capital levels given the concentrated loan portfolio and to cover the potential increase in provisions and a decrease in LTVs, which could require additional collateral in relation to Capital Centre B. Efficiency DLR has a high level of operating efficiency and its operating expenses have remained under control, supported by the fact that it does not operate a branch network. Its cost efficiency metrics compare favourably to those of its Danish and international peers. In January-September 2009, the cost-to-income ratio was 23% (2008: 23%, 2007: 28% and 2006: 29%) and the ratio of operating costs as a percentage of average assets was 0.15% (2008: 0.14%, 2007: 0.16% and 2006: 0.17%). Asset Quality Trend: Weakening DLR reported loan loss provisions of DKK67 million in January-September 2009, which is less than 0.1% of its lending. Total loan loss provisions represent around 0.2% of lending. We expect that problem loans will increase from the current low levels given the more challenging outlook for the Danish economy including the agricultural sector. DLR's loan portfolio of DKK130 billion is focused on agricultural lending (65% of the nominal value of mortgage bonds at end- September 2009), office and business properties (16%), private rental properties, including co-operative housing (13%), and owneroccupied dwellings (6%). Moody's views the diversification of DLR's portfolio in recent years as a positive development as it has increased its focus on non-agricultural areas, a trend that we expect to continue. Nevertheless, the institution holds a knowledge base in the agricultural segment, as shown by its low losses over the past few years. In addition, its agricultural portfolio is divided between various segments, mainly loans to cattle farming (around one-third of agricultural mortgages) and pig farming (also around one-third). Although these are relatively large segment exposures, the portfolio still displays good granularity, with the 20 largest exposures in DLR's loan portfolio accounting for around 5% of the total loan portfolio and around 100% of Tier 1 capital at year-end Moody's also notes that 89% of the loans were within an LTV of 50% at end Collateral is revalued at the time of refinancing if the size of the loan has increased. For collateral valuation, DLR uses its own valuers together with centralised individual credit assessments. A maximum of 30% of the property valuation can be animals and fixed machinery. Unharvested crops are excluded from DLR's portfolio; movables (animals and fixed machinery) amount to less than 5% of the valuation. In 2002, a collective guarantee agreement was put in place, whereby the originating banks cover losses on the agricultural portfolio from 0.25% to 2.5% per annum (losses above or below this range are at DLR's risk). The highest historical loss was at 2.1%, at the height of the Danish farming crisis in Lending to segments other than agriculture and that is originated by banks is covered by commercial guarantees given by the originating bank - these guarantees cover losses on loans exceeding 60% LTV for rental and social housing, above 35% LTV for offices and business properties, above 20% LTV for SMEs and above 0% LTV for the energy sector or for SMEs in the manufacturing sector. The guarantee is given for 16 years and for interest only loans for 20 years. At end- September 2009, more than 93% of DLR's total portfolio was covered by guarantees. The remainder generally has conservative LTVs. CREDIT RATINGS ARE MIS'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. Copyright 2009, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved. 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