DLR Kredit takes up §33e senior secured in Dkr4bn debut

Nov 29th, 2012

DLR Kredit on Wednesday for the first time issued senior secured debt pursuant to Section 33e of Danish covered bond legislation, selling Dkr4bn (Eu536m) of what are also known as Junior Covered Bonds.

The deal was split into two floating rate tranches, Dkr3bn of October 2015 paper and Dkr1bn of October 2017 paper.

With the launch of the inaugural deal, DLR Kredit joins BRFkredit, Nykredit Realkredit and Realkredit Danmark in issuing such senior secured bonds. While Nykredit has dubbed the instrument Junior Covered Bonds, the other issuers have avoided using this term to describe the senior secured debt, even if it has caught on.

The §33e debt ranks junior to traditional covered bonds but senior to the issuer’s senior unsecured debt for funds from the associated capital centre. Holders of the senior secured debt also have a claim against the issuer that ranks pari passu with senior unsecured bondholders.

In line with its previous rating of such instruments, Standard & Poor’s assigned the §33e bonds a rating equal to that of the issuer, in DLR Kredit’s case BBB+, on positive outlook.

§33e debt is used by Danish mortgage credit institutions to top up capital and add overcollateralisation when property prices fall and push up LTVs above regulatory limits. The proceeds of the issuance are invested in high quality collateral.

The additional funds necessary can be provided in other ways and Pernille Lohmann, investor relations manager at DLR Kredit, said that the issuer previously issued government guaranteed (GG) senior debt to this effect.

“We would like to redeem this,” she told The Covered Bond Report. “They mature next summer, but we would like to be out in good time.”

Lohmann said that the bank is considering selling a further Dkr2bn of the senior secured bonds in the spring.

Leads Danske and Nordea went out with price guidance of three month Cibor plus 135bp-145bp for the three year and plus 170bp-180bp for the five year. The books were open for three hours, by which time the deal was one and a half times covered. This resulted in final pricing of plus 135bp for the three year paper and plus 175bp for the five year.

A syndicate official at one of the leads said that the natural comparables for the deal were senior secured bonds from Nykredit and Realkredit Danmark, which he said have a “large pool” of such issues outstanding. He said that the three year paper was priced about 20bp wide of where Nykredit and RD trade, with the five year paper about 10bp-15bp wider.

He said that two reasons could explain the bigger pick-up on the shorter dated tranche: firstly, Nykredit and RD shorter dated paper having performed quite strongly in the past couple of months, and therefore possibly being considered a little rich; and secondly, DLR Kredit being keener on the shorter maturity and the larger size raised through the three year bond calling for a wider spread.

The syndicate official added that the Dkr3bn size of the three year tranche was comparable to the size of senior secured bonds that DLR Kredit’s much larger peers, Nykredit and RD, have issued, but that the Dkr1bn five year tranche was unusually small. He added that the five year might therefore lend itself to being tapped in future.

Lohmann said that the issuer had been mentioning to investors the possibility that it could issue senior secured debt since earlier this year and then, after announcing third quarter results on 25 October, recently had an investor seminar. She said that, with all the other Danish issuers except Nordea now issuing senior secured debt, the concept is now well understood in the Danish market.

The investors who participated in the deal were mainly domestic accounts, according to Lohmann, although a few foreign investors were also involved, with the lead syndicate official putting their share at just under 10%. He said that about 50 investors placed orders for the bonds.

DLR Kredit launched the deal this week ahead of the start of its December auctions on Monday. Nordea Kredit, Nykredit and RD all began their auctions last week, but the syndicate official said that DLR Kredit’s senior secured deal was not overshadowed by them.

“We still saw quite significant interest for this format, even if the auctions are going on,” he said. “It was encouraging to see that this was easily absorbed and there will still be investor demand for further deals.”

Denmark’s mortgage banks are otherwise well into the latest season of their traditional end-of-year refinancing auctions, with Nykredit Realkredit wrapping up the three largest issuers’ auctions next Thursday.

Nordea Kredit finished its auctions on Tuesday, and Realkredit Danmark’s last day of auctions is tomorrow (Friday), with BRFkredit’s sales finishing next Tuesday, a day after DLR Kredit’s begin.

Jacob Skinhøj, chief analyst at Nordea Kredit, said that the one year ARM bonds are being auctioned at very tight spreads, and that yields are set to be the lowest ever, and spreads the tightest ever during any refinancing auction.

“Nordea one year bonds are trading at around 20bp over Cita,” he said, “after tightening 3bp-4bp at the beginning, and Nykredit and Realkredit Danmark one year bonds are trading more or less at the same level, around 23bp-23.5bp over Cita.”

Jan Østergaard, senior analyst at Danske Bank, said that the pricing on the one year bonds has been very stable despite bid-to-cover ratios declining over the course of the auctions.

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