Danes widen in line with broader woes, Nykredit plans IPO

Spreads on Danish covered bonds being sold in the latest refinancing auctions widened in early sales in line with the pressures afflicting the broader financial markets, according to market participants, while the announcement last week of a planned Nykredit IPO has also been in focus.

Nykredit Realkredit kicked off approximately Dkr123bn (Eu16.5bn) of auctions on Friday. Nordea Kredit and BRFkredit are beginning their sales today (Tuesday), and DLR Kredit tomorrow (Wednesday).

The first day comprised just one year ARMs bonds, which were sold at a yield of minus 3bp and achieved a bid-to-cover ratio of 3.17. Nykredit then added three and five year paper yesterday (Monday), when Realkredit Danmark (RD) also entered the market.

“In general spreads have been widening a bit versus secondaries in the past couple of weeks due to what has been going on in the equity and credit markets,” said Lars Mossing Madsen, chief dealer at Nykredit.

Spreads on three year paper are some 4bp-5bp wider than ahead of the auctions, he said, with five years having widened a little less, while one year paper is some 6bp wider, at around 35bp over Cita today.

However, the wider spreads have attracted greater demand, according to Madsen, who noted that, for example, the bid-to-cover on Nykredit’s five year paper had increased from 2.22 yesterday to around 4.5 today (Tuesday).

An analyst said that moves in the five year segment were particularly notable, highlighting two trends playing into these. Firstly, a general weakening in longer dated Danish bonds over the past year – since the Danish central bank acted on speculation about the krone cap – which had also been evident in the government bond market, also partly reflecting the risk-off sentiment.

And secondly, news from Nykredit last Thursday (4 February) – in conjunction with an announcement of its planned listing – that loan administration margins will be increased, most significantly for short dated mortgages.

“The administration margin increase is implemented in step with the objective of the Supervisory Diamond of the Danish Financial Supervisory Authority, which aims to ensure a limited use of interest-only loans, highly interest rate sensitive loans and loans with frequent refinancing,” Nykredit said.

The analyst said that this has been perceived as giving a further push to an existing trend of supply being increasingly weighted towards longer maturities.

The planned IPO of Nykredit Holding would be a historic move for the mutual institution, although under the group’s plans the Nykredit Association that owns 89.9% of Nykredit today would nevertheless retain a controlling interest post-listing.

The Danish group said the move is rooted in the challenge Nykredit is facing in terms of the new and stricter capital requirements underway from international authorities.

“The forthcoming requirements are not final yet, but their scope is expected to be significant,” said Nykredit. “In the absence of fundamental changes, these requirements, even in a minimum version, will pose a substantial challenge for Nykredit with its current structure.

“A challenge that Nykredit, as a responsible, systemically important financial institution, must address and strive to resolve now.”

Nykredit has cited the potential introduction of mortgage risk weight floors under Basel IV among factors putting unwarranted pressure on capital requirements.

Nykredit said that it expects to be ready for an IPO within 12-24 months, but that the final timing of a listing depends on market conditions and whether “sufficient clarity is achieved about the coming international capital requirements”. Rothschild has been appointed adviser.