ARM auctions to reflect Danes moving away from one years

Nykredit Realkredit will kick off Danish mortgage credit institutions’ October refinancing auctions on Monday, for which BRFkredit and DLR Kredit today (Thursday) announced expected supply figures, with analysts noting a shift away from one year ARM bonds.

Nykredit Realkredit will auction the largest volume of bonds. Its offering will comprise Dkr76bn (Eu10.2bn) in Danish krone-denominated fixed rate bonds to refinance ARMs, plus Dkr10.9bn in floating rate mortgage bonds, including euro issuance. Its auctions will finish on 29 August.

Nordea Kredit is due to auction Dkr24.54bn and Eu296m (Dkr2.21bn) of Danish krone and euro-denominated ARM bonds, respectively, from 26-28 August. The bulk of the bonds is one year issuance, for Dkr18.9bn.

BRFkredit’s auctions will be the issuer’s first since it merged with Jyske Bank in April, and it today (Thursday) announced that refinancings will be carried out in traditional non-callable bullet bonds as well as “RTL F bonds”, one of two new types of bonds that were launched in June.

The RTL F bonds are pre-financed fixed rate bonds with a legal maturity of three to 30 years, for bullet loans, and are callable every year on a payment date. Exercise of the call is linked to the result of a separate annual refinancing.

These and another new bond type, floating rate bonds with annual coupon fixings, were launched by BRFkredit in June to exclusively finance existing mortgage products, with the expectation that they will improve liquidity measures in a rating agency and regulatory context.

The issuer will hold its auctions from 25-29 August, inclusive, and it expects to offer Dkr7.9bn of RTL F bonds, and Dkr1.3bn in aggregate of three and five year traditional non-callables.

Like BRFkredit, DLR Kredit announced auction amounts shortly before Nordic FIs & Covered went to press. It expects some Dkr14bn to be refinanced in one year bonds, and around Dkr3bn in two to five year bonds.

Danske Bank analysts have estimated the total supply of Danish krone denominated ARM bonds at nearly Dkr130bn, coming up with this figure before BRFkredit and DLR Kredit had announced expected supply amounts.

“It’s not a very large auction,” said Jan Weber Østergaard, senior analyst at Danske Bank, “and we don’t expect spreads to move significantly.”

Lars Mossing Madsen (pictured), chief dealer at Nykredit, said that while overall the size of the refinancing auctions is limited, Nykredit’s auction is nonetheless “reasonably big”.

“Due to good interest in these bonds I think we will see business as usual,” he added. “I think levels will be more or less in line with secondary market spreads.”

He put the spread over Cita on one year ARM bonds at around 16bp-18bp, which is also the level he expects from the auctions.

Denmark’s mortgage banks have for some time been trying to move borrowers away from one year adjustable rate mortgages to products with longer interest rate periods, and analysts noted that the refinancing rate in one year bonds has fallen, indicating borrowers are moving to different mortgage products.

Uffe Kalmar Hansen said that auction amounts are lower than expected, and noted that refinancing rates are below historical levels. At Nykredit the percentage of one year ARM bonds being refinanced is 86%, and at Nordea it is 76%, according to Hansen.

“The lower numbers should be supportive for the auctions,” he added.

Another analyst noted that at Nykredit, for example, there has been a shift from one year to three year bonds, in keeping with expectations that some borrowers will lock in low interest rates for a longer period, and that borrowers are also moving into different products, such as floating rate mortgages or fixed rate products, across the industry.

“In 2013 Realkredit Danmark, for example, introduced a Cita-based mortgage loan and increased the cost of their FlexLån, so there have been some moves away from the one year ARM bonds to the Cita floater,” he said.

Pernille Lohman, investor relations manager at DLR Kredit, said that the bank launched a remortgaging campaign in February to encourage borrowers up for refinancing in March to move out of short-dated ARM bonds.

A similar campaign targeting borrowers up for refinancing in September has been running over the last months, and the impact of that on DLR Kredit’s existing stock of non-callables will become visible at the end of August, which is the deadline for borrowers to change mortgage loan refinancing profiles.

“Our March auctions showed that some borrowers are moving out of one year bonds, but that was only a smaller auction, and we’ll have to wait and see how many people will move out this time and not least at the large end of year auctions,” she said. “But our new gross lending has been successful in this regard, and we have announced that it will be more expensive if borrowers stay in the one year.

“We expect them to react, but how many we can’t say yet.”

The upcoming refinancing auctions are the second to involve the sale of covered bonds that feature maturity extension triggers in accordance with new legislation in Denmark, but according to market participants there is not much of a spread differential between the new and old bonds, which are no longer being issued.

Østergaard said that in the last refinancing auctions, which were for bonds with a 1 July repayment date, the interest trigger bonds came with a premium of roughly 5bp to the old style bonds, but that they have tightened by some 2bp.

“Overall the spreads are almost the same, and it’s a very small premium for the borrower,” he said.

Realkredit Danmark is not participating in the latest auction season.