DLR Kredit ARMs tighten after delivery of S&P triple-A rating

Spreads on one year adjustable rate mortgage (ARM) bonds sold by DLR Kredit narrowed versus Nykredit ARM bonds on the second of two days of auctions by DLR, said analysts, after the issuer obtained a preliminary triple-A rating of its Capital Centre B issuance from S&P.

Jan Weber Østergaard, senior analyst at Danske Bank, said that the spread differential between DLR Kredit’s and Nykredit’s ARM bonds narrowed to 1bp-2bp on the second day of the auctions, after standing at around 5bp-6bp on Monday.

DLR Kredit’s ARM bonds were auctioned at 39.4bp over Cita on Tuesday, and 43.5bp on Monday, with swap rates widening by 4bp over the course of the two days, he said.

The spread differential versus Nykredit is narrower than it has been in the past, when a premium of 8bp-10bp has been typical, according to Østergaard.

“The levels are tight for DLR,” he said, noting that spreads had tightened following S&P’s assignment of a triple-A rating to the issuer’s covered bonds.

“Just before the auction people knew that DLR Kredit would receive an S&P rating of its covered bonds,” he said, “but we didn’t know if it would be triple-A or not. The triple-A rating was slightly surprising, but it is positive and took out rating risk in between the two days of the auctions.”

Standard & Poor’s on Monday assigned a preliminary AAA rating to DLR Kredit’s Capital Centre B, out of which the ARM bonds are issued.

The rating means that for the first time ever all major capital centres of Danish mortgage banks have triple-A ratings, said Jacob Skinhøj, chief analyst at Nordea Markets, noting that on Monday one year DLR Kredit ARM bonds were trading 6.5bp cheaper than similar ARM bonds from Nykredit, the largest Danish issuer, and 3.5bp wider on Tuesday.

The issuer has also applied for a rating of its General Capital Centre, said Pernille Lohman, investor relations manager at DLR Kredit, and while this had yet to be announced it is less important because the capital centre has not been used since 2007, having been closed when DLR Kredit switched from issuing mortgage bonds (realkreditobligationer (ROs)) to covered bonds enabled under new legislation on særligt dækkede obligationer (SDOs).

“Capital Centre B is the most important as this is what we use for our ongoing auctions and issuance,” said Lohman. “It took more time than expected to get the S&P rating.”

In the interim the issuer had only been able to advise investors that an S&P rating was expected to be assigned soon, she said, with the first day of the ARM bond auctions taking place before the preliminary rating had been assigned.

“It was a very good result on Monday even without the rating,” she said. “There was good demand and a nice bid-to-cover ratio, and we were satisfied with the pricing.”

Around Dkr11bn (Eu1.48bn) of the ARM bonds were auctioned over the two days. DLR Kredit also auctioned longer dated covered bonds on Tuesday afternoon, but the volumes are small compared with the allotment of ARM bonds.

S&P’s preliminary AAA long term rating is on stable outlook. It has determined DLR Kredit’s Capital Centre B to be a Category 1 programme and assessed the asset-liability mismatch (ALMM) to be “low”. The combination of these two measures allows Capital Centre B issuance to be rated up to seven notches higher than the issuer credit rating.