Danes set to discuss extension legislation after softening

The Danish parliament will tomorrow (Friday) discuss government legislation on conditional forced maturity extensions in mortgage bonds for the first time, with the final draft softer than the initial proposal in a bid to address investor concerns.

According to market participants several changes have been made since the initiative was first announced by the Ministry of Business and Growth on 6 November, which released a first draft of the legislation on 14 November.

Folketinget, the Danish parliament

Under the initial plans, bonds would be subject to a maturity extension and yield step-up of 5% in the event of either yields at auctions being more than 5% higher than on the bonds that are being refinanced or auctions failing.

One of the main changes is that only bonds with a term to maturity of up to 37 months will be subject to the yield trigger

Another change is that if the maturity extension trigger is activated, the underlying bond will be modified by a one year maturity extension instead of being converted into a long term callable fixed rate bond. According to Danske Bank analysts, if the maturity extension is triggered by the yield increase criterion then a one year maturity extension can only take place once. If the maturity extension trigger is an auction failure, then further maturity extensions can take place if the mortgage bank continues to be unable to sell the bonds in the following years, they said.

The Danish parliament is scheduled to discuss the bill for the first time tomorrow. The legislation will also have to go through a committee stage before the parliament holds a final vote, which one market participant said is expected in the New Year.

Ane Arnth Jensen, managing director of the Association of Danish Mortgage Banks, said that the changes to the draft legislation reflect the concerns of investors, who felt that the first version presented some challenges.

“In general the changes reflect their concerns as well as ours,” she said. “This is an important aspect when it comes to the parliament’s discussions, because it’s central to make sure our bonds are in line with the demands and wishes of investors.”

The association is also emphasising the importance that the Danish authorities work to ensure that the maturity extension legislation satisfies rating agencies’ concerns about refinancing risk.

“Other important issues in the longer term are that the legislation is NSFR-compliant for when the EU comes back to this,” said Jensen, “and that it does not disrupt the level playing field between mortgage banks and universal banks.

“That is something that needs to be looked into over the coming weeks.”