Fitch sees merits and questions in Danish plan

A Danish government plan under which bonds refinancing Danish ARMs would automatically extend in certain stressed scenarios would greatly reduce associated refinancing risks, according to Fitch, but the rating agency on Wednesday also said that there are questions regarding details of its implementation.

Under the plan, bonds financing adjustable rate mortgages (ARMs) would face mandatory extension if auctions to refinance them fail or result in an interest rate at least 5% higher than on the bond being refinanced. In such scenarios the coupon would be fixed 5% higher for at least another year by which the bond would extend and possibly as long as the term of the underlying mortgages.

Details regarding just what happens after the step-up and extension in the first year are the main open questions in the plan and are being discussed in a consultation on the government’s proposals that ends today.

Fitch said that even though it considers the risk of an auction failing to be very limited, “the significant concentration of maturities remains a potential concern and refinancing risk is the key factor limiting the uplift (D-Cap) that mortgage bond ratings can achieve above their issuer’s long term Issuer Default Rating”.

The rating agency said the government’s proposal could mitigate this refinancing risk and reduce the potential systemic risk created by Denmark’s large mortgage market and relatively large proportion of short maturity bonds.

“But our credit view would largely depend on how the authorities and issuers address the questions raised by this new law,” it added, “particularly as it affects issuers, investors and borrowers differently. Notably, a bond’s maturity could be extended more than once, which raises questions about the definition of its legal final maturity date. Nevertheless this could be addressed in the bond documentation.”

The government has already delayed implementation of the changes from 1 January to 1 April 2014 as it works out the details with market participants.

“Full implementation would take time as existing bonds matured and were subsequently refinanced,” noted Fitch. “We estimate the provisions would apply to a large part of the Danish mortgage covered bond market by end-1Q15.”

DNB drops Fitch from covered bond ratings

DNB Boligkreditt has asked Fitch to withdraw the ratings of its covered bonds, according to a filing on Tuesday) with the Norwegian issuer retaining Moody’s and Standard & Poor’s.

The three agencies all rate DNB Boligkreditt’s covered bonds triple-A. Moody’s rates DNB Bank A1 and S&P rates it A+, but Fitch does not have a rating of DNB Bank, according to DNB’s website. DBRS rates DNB AA.