Interview: Anders Lund Hansen, BRFkredit

Jan 10th, 2013

Anders Lund Hansen, group treasurer at BRFkredit, spoke to The Covered Bond Report’s Neil Day about the issuer’s plans for an inaugural senior unsecured trade off a new EMTN programme.

What are your aims for a deal if you launch one after the upcoming roadshow?

Anders Lund Hansen image

Anders Lund Hansen

The purpose of our upcoming roadshow is to broaden knowledge of BRFkredit as a new Nordic issuer for the European investor community.

We are fortunate to have a very strong domestic investor base both for our covered bonds and for senior secured and unsecured debt. That said, we feel the time is right to look outside Denmark. We have already in the last 12-18 months been doing investor work in Germany, the UK and France, and our newly established EMTN programme is another tool which hopefully will enable us to attract European investors and further strengthen our investor base.

If we have a successful roadshow, and market conditions permit it, we are looking to issue Eu500m of senior unsecured debt with a maturity of three to five years. It’s important for me to state that we will continue with our European investor work, and that we are looking to build a curve in the European market. If we do not experience any reductions in our OC requirements, I would expect us to issue in benchmark size again within 12-18 months.

What are the key messages about BRFkredit you will be trying to get across to investors?

I’m hoping to get five key messages across.

Firstly, on the strong legal framework under which we operate. We are a specialised Danish mortgage lender founded in 1959, but with a part of our business going back to 1797. Our balance sheet is approximately Eu27bn — making us the fourth largest mortgage lender in Denmark. We operate under the Danish Mortgage Act and risks are strictly regulated. The balance principle insures a match funding of the mortgages we generate and thereby mitigates funding risk of our loan book.

Secondly, on bondholder value. We are owned by a foundation with the sole purpose of continuing mortgage lending. The foundation has no other financial obligations, and there are no dividend payments. All income is used to strengthen the company, creating bondholder value.

Thirdly, our loan book is concentrated around the larger cities in Denmark, and around 83% of our exposure is residential exposure. We have no agriculture and only 1% industrial property exposure on our balance sheet.

Fourthly, over the last couple of years we have continuously improved our earnings, and in 2012 we have implemented further initiatives to improve earnings going forward. 2013 should benefit from our new price structure, increased administration fees, quotation costs on ARM loans, and a reduction in our interest expenses.

And finally, we have a very strong capitalisation, with a core capital ratio of 19% at the end of Q3 2012, and even after the redemption of our hybrid core capital (in November 2012) we are able to show a core capital ratio of over 16%.

Why are you opting for a senior unsecured rather than secured transaction?

We decided to go on the roadshow with the possibility of issuing senior unsecured debt afterwards because both the asset class and our EMTN documentation is commonly known and accepted. We felt that it was important for investors only to focus on BRFkredit and what we, as a new Nordic issuer, have to offer. This would not have been the case if our first European issuance had been a senior secured transaction under Section 33e of the Danish Mortgage Act.

I think international investors are slowly beginning to look at senior secured debt (Section 33e issuance), and German investors in particular have adopted the asset class. Despite this, I still feel there is some way to go before the asset class is broadly known and accepted.

The asset class unfortunately tends to fall between two stools, where it’s too risky for covered bond investors and offers too little pick up for senior unsecured investors.

Both BRFkredit and some of the other Danish mortgage lenders will continue to talk to international investors regarding senior secured debt, and we will hopefully issue senior secured debt to international investors in the future.

How did your covered bond sales go in the December auction season?

Our December refinancing auction was very well received by investors. We experienced solid demand for our covered bonds during the 10 day period, and we managed to refinance our ARM loans at the lowest rate ever.

We benefitted from excess liquidity in both the domestic and European markets, and the basis swap in euros and US dollars versus Danish kroner gave investors further incentives to invest in Danish mortgage bonds.

What are your overall funding plans for this year, for senior and covered bond issuance?

If market conditions permit it, the upcoming Eu500m issue will cover the majority of our need for senior debt in 2013, but we might do smaller private placements in both the European and domestic markets, either as senior secured or senior unsecured.

The funding of our mortgages is done via our daily tap issuance of covered bonds, so if investors are looking to invest at times with issuance around benchmark size or higher, the refinancing auctions are probably the best time to look at Danish covered bonds. BRFkredit expects to offer bonds for refinancing of existing ARM loans in late February or early March and again in late October.

How is the joint funding going? Do you expect other banks to join?

The joint funding agreements are generating a very solid flow of low LTV residential mortgages to BRFkredit, and we expect this to continue. So far the banks are generating loans under the agreement of approximately Dkr1.5bn (Eu201m) per quarter. This number is in line with our expectations.

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