DLR drops Moody’s, getting ‘best ever’ auction pricing

Dec 7th, 2012

DLR Kredit cut its ties with Moody’s on Monday, a move that it had planned for some time and was able to implement after its General Capital Centre was rated by S&P last week, and the issuer believes having triple-A ratings in place is having a beneficial impact on its December auctions.

The issuer had in late September obtained a AAA rating from Standard & Poor’s of its Capital Centre B, which it issues adjustable rate mortgage (ARM) bonds out of, and was at the time waiting for a rating of its General Capital Centre. DLR Kredit no longer uses this capital centre, but it was used for the issuance of realkreditobligationer (ROs) until 2007, when new covered bond legislation was introduced in Denmark, and DLR Kredit still has ROs outstanding.

S&P on Monday if last week (26 November) assigned a AAA rating, on stable outlook, to DLR Kredit’s General Capital Centre and Pernille Lohmann, investor relations manager at DLR Kredit, said that this paved the way for the issuer to terminate its relationship with Moody’s, as had been planned and flagged for some time.

“It is our impression that investors have lost confidence in the way Moody’s rates Danish covered bonds and we also do not agree with the way Moody’s views the Danish economy and the mortgage credit model, for example,” she told The Covered Bond Report. “We had to wait until we had other ratings in place because we have investors who cannot hold our bonds if they are not rated.”

This situation came about as a result of S&P’s rating of the General Capital Centre, with DLR Kredit following up on this by terminating its relationship with Moody’s, on Monday announcing that it has requested the rating agency to withdraw its ratings of the issuer and its bonds. The issuer does not expect to seek ratings from a second rating agency, according to Lohmann.

After DLR Kredit’s move, Nordea Kredit is the only Danish mortgage credit institution left with Moody’s ratings.

DLR Kredit is the only mortgage credit institution yet to finish end-of-year ARM bond refinancing auctions, after Nykredit Realkredit wrapped up its sales today (Thursday). DLR Kredit is alternating between auctioning Danish krone denominated and euro denominated ARM bonds until next Monday, and is expected to offer Dkr27.6bn (Eu3.7bn) of one year Danish krone denominated ARM bonds, and Eu2.75bn of euro denominated one year bonds.

DLR Kredit’s Lohmann said there has been strong demand and the pricing on the bonds is the best DLR Kredit has ever achieved, adding that she believes the ratings situation has made a difference.

“We can’t know for sure, but the fact that our bonds are triple-A rated now must be one of the reasons for the pricing,” she said, “as it is the most visible change.”

Bid-to-cover ratios have not been very high so far, but they are higher than in recent years, she added, noting that spreads on the issuer’s auctioned bonds are close to those achieved by the other, larger mortgage banks.

“We are very satisfied,” she said.

The bid-to-cover ratios on one year Danish krone denominated DLR Kredit ARM bonds were 1.7 and 1.72 on Monday and yesterday (Wednesday), respectively, and 1.85 and 1.42 on Tuesday and today for auctioned euro denominated ARM bonds.

Bjørn Olesen, analyst at Nykredit Markets, said that demand was therefore not that high, but that this made sense in part because DLR Kredit is a smaller issuer, for example auctioning just over half of the offering from Nykredit Realkredit.

The somewhat lower demand could also be due to the collateral predominantly being agricultural as opposed to mortgage loans, suggested Olesen, which could temper demand from foreign investors. However, DLR Kredit’s one year bonds are being auctioned at levels that are roughly in line with spreads achieved by other issuers, he added. The spread on the one year Danish krone bonds was around 24bp-25bp over Cita.

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