Basel III prompts Nykredit to open Danes’ auction season early

Nykredit will kick off the latest Danish auction season on Wednesday when it opens Dkr105bn (Eu14.1bn) of sales after bringing forward the start of its refinancings of adjustable rate mortgages (ARMs) ahead of the implementation of Basel III.

Among other Danish mortgage credit institutions, Realkredit Danmark will not be involved in the refinancing season, but Nordea Kredit will be holding auctions on 4-6 September, DLR Kredit is expected to announce sales and BRFkredit to sell bonds for refinancing.

Nykredit’s auctions — for Nykredit Realkredit and Totalkredit — will comprise Dkr97bn of fixed rate mortgage bullets and Dkr7bn in floating rate mortgage bonds, with sales in Danish kroner and euros. Most will be SDOs out of capital centre H, but it will also be selling ROs out of capital centres G and D.

Morten Bækmand, head of investor relations, group treasury at Nykredit, said that the auctions are starting earlier this year in light of Basel III.

“We have moved them forward a little in order to start to at least partly comply with the LCR requirement so the auctions are finished and we have the money 30 days before the old bonds mature on 1 October,” he said.

The Dkr105bn Nykredit is auctioning compares with some Dkr80bn a year ago and Dkr136bn last December — the month that has historically seen a concentration of Danish auctions. The group has been building up its March and September auctions in a bid to spread its refinancings more evenly through the year and satisfy pressure from regulators and rating agencies.

“Last year we were in the process of building up this September refinancing,” said Bækmand. “It’s relatively recently that we started to issue bonds with a maturity on the 1 October to get even-sized refinancings.

“So far we have three per year and eventually we expect to have one in June as well, so that we have quarterly auctions — but we haven’t implemented that yet.”

Lars Mossing Madsen, head of bond trading at Nykredit, said that he expects the auctions to be “business as usual”.

“If you look at the secondary market, the bonds are trading very well,” he said. “Against swaps, I’d be surprised if we don’t come flat to secondaries.

“The one year is at around Cita plus 33bp, so it would be realistic to expect around 35bp.”

Anders Aalund, chief analyst at Nordea Markets, said that he expects the auctions to be “a walk in the park”. He said that the only potential problem had been a fear of an increase in the volume of longer dated bonds being auctioned, but that this had not materialised.

“There has been a discussion in Denmark about the mortgage credit institutions trying to move their clients from one year to longer dated ARMs,” said Aalund. “So there was a little fear that you would get a larger amount of long dated bonds, which could have caused some problems during the auctions.

“However, that discussion seems to have ended a bit, so there is only about Dkr20bn in three and five year bonds.”

He said that he expects these, as well as the one years, to be in demand.

“In the last half year the three and five year bonds have widened and they will be very attractive to investors,” said Aalund. “The one years are currently trading on a Cita basis at around 31bp and given the low interest rates at the moment, this level also seems very attractive.”