Fives star in healthy ARMs start, size an evolving factor

Aug 21st, 2015

The latest Danish quarterly sales of bonds to refinance adjustable rate mortgages (ARMs) achieved healthy bid-to-cover ratios after Nykredit Realkredit kicked off activity on Monday, with longer dated paper offering relatively high spreads particularly well bid.

Nykredit imageNykredit and BRFkredit have been active so far, while Nordea auctions are scheduled for next Tuesday to Thursday and DLR Kredit is set for early September, with some Dkr100bn of issuance due in total.

The sales started with Dkr4.1bn (Eu549m) of one year bonds and Dkr3bn of three years from Nykredit on Monday, with Denmark’s largest mortgage lender achieving bid-to-covers of 3.66 and 3.26, respectively. The one year bonds were sold at a yield of 0.08% and a spread to Cita of 22.8bp, according to Lars Mossing Madsen, chief dealer at Nykredit.

“It went in line with expectations,” he said, “and the bid-to-covers were definitely better than expected, showing strong interest in the bonds.”

Bid-to-covers in daily auctions of the one years ranged from 3.12-3.86 in the following sales until today (Friday).

The highest bid-to-cover achieved by Nykredit was for a five year sale on Tuesday, when it achieved 6.24, and levels for the longest dated ARMs bonds were at between 3.96 and 4.80 over the next three days. Market participants had expected good demand for the longer dated ARMs, with spreads on five year paper having been at wide levels.

According to Jan Weber Østergaard, senior analyst at Danske Bank, the level achieved on Tuesday’s five year issuance was 5bp inside where such paper had been indicated before the auctions, on Friday.

“We had already believed that one year non-callable bullets might sell slightly cheaper relative to three year and five year prices, with a flattening of the asset-swap curve thus becoming a reality,” he said.

Three year Nykredit sales achieved bid-to-covers of between 3.03 and 3.93 from Tuesday to today.

The volume of one year krone ARMs is down sharply in the latest auctions, with the Danish mortgage credit institutions having for mainly regulatory and rating reasons encouraged borrowers to take out alternative mortgages that do not have to be refinanced at such short terms. While this has brought hoped-for benefits to issuers, the trend is having an increasing impact on the market pricing and liquidity of smaller issues that are being sold, according to market participants, particularly with LCR implementation progressing.

According to Anders Aalund, chief analyst at Nordea Markets, 34% of the bonds in Nordea Kredit’s forthcoming sales on a volume-weighted basis do not meet Level 1B eligibility, although the figure is only 4% for Nykredit. Size is also seen as an issue for the smaller BRFkredit and DLR Kredit.

“However, the LCR requirement is by no means the only requirement determining success or failure,” said Aalund. “Several other factors make the sale of so many separate security IDs problematic.”

Danke’s Østergaard said these include the generally lower liquidity of smaller issues, with lower turnover, less price transparency, and higher costs for market-makers.

On Tuesday BRFkredit flagged the likely LCR status of bonds in its forthcoming sales taking into account not only the latest supply but further anticipated issuance. It indicated that two would be Level 1B (with an estimated total above Eu500m equivalent) and two 2A (above Eu250m), and that two would not achieve eligibility for either category.

“The estimates should give the investors the best possible prerequisite to calculate the liquidity value in connection to the Liquidity Coverage Ratio,” it said.

On Wednesday BRFkredit held a Dkr500m sale of a three year bond that, although too small at the outset, is one of the issues it expects to achieve Level 2A size. According to Nordea’s Aalund, this issue came at a spread some 10bp wide of where Nykredit Realkredit had sold three year paper.

“This is not pure non-LCR paper, so the 10bp does not exactly reflect the premium that non-LCR paper will have to pay,” he said. “This is also a process that will go on for some time.”

He suggested that small issues may require a premium of as much as 20bp-25bp at the next set of auctions in three months’ time.

“It is getting more and more important,” said Aalund.

BRFkredit also sold paper yesterday (Thursday) and it will hold further sales on Tuesday to Thursday of next week, raising some Dkr8.3bn in total.

Nordea Kredit will be selling some Dkr18.5bn equivalent of paper on Tuesday to Thursday of next week, Dkr16.93bn in kroner and Eu210m in euros, of which Dkr10.5bn and Eu170m will be one years.

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