DLR, Nykredit get record lows in Danish auction season finale

Dec 14th, 2012

DLR Kredit wrapped up the 2012 year-end refinancing auction season for Denmark’s mortgage banks on Monday after Nykredit finished its sales last Thursday, with the issuers reporting that the auctions resulted in record low rates for borrowers.

NykreditNykredit Realkredit will on 2 January reset interest rates on the adjustable rate mortgages (ARMs) that were refinanced via its recent auctions, with borrowers set to benefit from historically low rates resulting from the auctions.

Morten Bækmand, head of investor relations at Nykredit Realkredit, said that the issuer’s December auctions went exceptionally well this year.

“Investors are awash with cash, and Denmark is still seen as a safe haven, so we saw very high bid-to-cover ratios across the auctions, which is very positive,” he said. “Danish homeowners have never had interest rates as low as this.”

A borrower with a 30 year annuity loan of Dkr1m (Eu134,062) will pay a cash rate, with repayments, of 0.36% for ARMs funded by one year interest reset bonds, according to Nykredit, which compares with 1.12% for 2012. The average yield on one year Danish krone ARM bonds auctioned by Nykredit was 0.25%.

Lars Mossing Madsen, chief dealer at Nykredit Realkredit, said that the auctions resulted in historically low rates, and that the way in which the auctions of the one year Danish krone and euro denominated ARM bonds unfolded suggests there was good interest from foreign investors.

“The spreads over Cita before the auctions were around 10bp wider than when the auctions started,” he said, “and demand stayed strong during the course of the auctions, which is usually the case.

“It seems like there was some international interest in the short dated bonds, and that there were maybe some new accounts involved, too, because it is not normal that spreads moved so dramatically.”

Bækmand said that the issuers do not know the identity of the investors as their bids come in via investment banks, but that anecdotal evidence points to there having been quite significant foreign investor interest, in particular in the euro bonds.

“We also know that some investors were planning to bid but in the end they stayed away because spreads are so tight.”

The results of an auction of Danish krone denominated floating rate notes stand out, according to Bækmand.

“They were so massively oversubscribed we’ve never seen anything like it,” he said.

Whereas the bid-to-cover ratio on Nykredit’s one year Danish krone ARM bonds was 3.4, that shot up to 4.17 for the floating rate bonds that were auctioned on a standalone basis.

Other positive aspects of the auctions from Nykredit’s perspective include a move by some customers to refinance their mortgages by taking out loans with longer interest reset periods.

“It is something that we have been advising clients to do, and although the take-up has not been massive the trend is there,” said Bækmand. “It’s positive because it reduces refinancing risk for homeowners, and reduces the amount of bonds that we have to refinance.”

DLR Kredit on Monday wrapped up its auctions with an offering of one year euro denominated ARM bonds, bringing to a close the 2012 year-end refinancing auction season for Denmark’s mortgage banks.

Pernille Lohmann, investor relations manager at DLR Kredit, said that the mortgage bank achieved good pricing on its auctioned bonds although demand was not that strong. This could be in part because DLR Kredit held its end-of year refinancing auctions later than the other mortgage banks, which have moved their auctions forward into November, a move that DLR Kredit also intends to make.

“Demand slowed toward the end of the auctions for all mortgage banks,” said Lohmann. “The timing of our auctions is at the moment hardwired into documentation, so we need to get borrowers’ permission to change the dates, but we think it would be better for us to be able to move the auction time forward in line with other Danish mortgage issuers. By December, investors may have closed their books.”

The issuer is also aiming to improve its investor reporting in relation to the auctions, she said, for example by publishing daily results and also publishing the interest rate from the investors’ point of view, as opposed to the cash loan interest rate for borrowers.

DLR Kredit’s auctions of one year Danish krone ARM bonds resulted in a cash interest rate, calculated on the basis of a 30 year annuity with payments, of 0.388% for a one year ARM loan. Last December the cash loan rate on the one year Danish krone ARMs was 1.27%, and at the September 2012 auctions this was 0.51%.

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