Nordea closes with tight levels, Nykredit in bumper refinancing

Feb 28th, 2013

Nordea Kredit wrapped up its latest ARM bond refinancings today (Thursday), achieving slightly tighter levels than expected, according to one analyst, while Nykredit Realkredit is four days into one of its largest auction seasons.

In Danish kroner, Nordea auctioned Dkr16.1bn (Eu2.2bn) in total, Dkr12.9bn of one year ARM bonds, Dkr210m of two years, Dkr2.33bn of threes, Dkr40m of fours, and Dkr620m of five year bonds. It also sold Eu170m of one year ARM bonds in euros across two days.

Nordea’s auction volumes were relatively small in comparison with Nykredit, which is set to offer Dkr109bn in Danish krone ARM bonds, of which Dkr88bn will have a one year interest reset period. It is also expected to auction some Eu2bn of euro denominated interest-rest bonds.

This is one of the issuer’s largest refinancings, according to Björn Sebastian Olesen, analyst at Nykredit Markets.

Another analyst said that the small size of Nordea’s auctions explains the tighter than expected spreads at which its bonds were auctioned. The issuer’s three year and five year Danish krone bonds came at 4.4bp and 24bp, respectively, over three month swaps today, he said.

The bid-to-cover on Nordea’s one year ARM bonds declined from 4.02 on Tuesday, the first day of its auctions, to 3.62 today, while the bid-to-cover on its three year offering rose from 2.55 on Tuesday to 3.48 today.

The bid-to-cover on one year Danish krone ARM bonds auctioned by Nykredit today was 2.53, in line with the previous days’ but down from 3.56 on Monday, when the mortgage credit institution started its auctions, with Nordea only commencing the day after.

Nykredit kicked off its auctions via a sale of Dkr8bn and Eu300m of one year ARMs in Danish krone and euros, respectively. The April 2014 Danish krone bonds were sold at 20.1bp over Cita and the one year euro bonds at 29.6bp over Eonia, according to a covered bond analyst.

“Those are more or less the levels from before the auction,” she said, adding that the results were in line with expectations.

On Tuesday, the first day that Nordea and Nykredit auctions overlapped, the spread between the issuers’ one year bonds was 3bp, which was in line with expectations of a 1bp-3bp differential, according to Jan Weber Østergaard, senior analyst at Danske Bank.

Nordea’s one year bonds were sold at 17.1bp over Cita versus 20.5bp over for Nykredit’s on Tuesday — the Nykredit level unchanged from Monday — with the bid-to-cover on Nordea’s offering reaching 4.02 compared with 2.5 for Nykredit’s.

The pricing at the auctions yesterday (Wednesday) was almost unchanged compared with the day before, added Østergaard, with the spread between Nordea and Nykredit one year bonds therefore maintained at 3bp.

With results from today’s auctions only newly in as Nordic FIs & Covered went to press, another analyst said that the spread between Nordea and Nykredit one year ARMs has been relatively stable over the course of the auctions, at 3bp-4bp.

Olesen at Nykredit said that the one year Danish krone interest reset bonds have been auctioned at low yields, despite an interest rate hike by the Danish central bank in January.

Nykredit yesterday auctioned its first Capital Centre G bonds as part of its April refinancing. It uses this capital centre to fund, via traditional Danish mortgage bonds (realkreditobligationer, or ROs), top tier loans with LTVs from 60%-80% originated under the bank’s two-tier model. In contrast to covered bonds (særligt dækkede obligationer, or SDOs), ROs do not have to comply with continuous LTV limits so that overcollateralisation does not have to be increased if the market value of the collateral declines. It uses SDOs to fund mortgage loans with LTVs up to 60%.

Olesen said that the expectation had been for a spread differential of around 11bp between Capital Centre G ROs and Capital Centre H SDOs, in line with market levels before the auctions, but that this tightened to 9bp.

Yesterday one year euro Capital Centre G ROs traded at 36.3bp over Eonia, according to Olesen, while one year Capital Centre H SDOs traded at 26.9bp to provide for a 9bp spread. Today Nykredit auctioned one year Capital Centre G ROs in Danish krone, which came at 30.8bp over Cita versus 22bp over for one year Capital Centre H SDOs in Danish krone.

Nykredit’s auctions run until 8 March. Realkredit Danmark will join the April 2013 refinancing auctions on 4 March, with its auctions running until 15 March. DLR plans to hold auctions across five days in early March while BRFkredit will participate in the forthcoming ARMs refinancing season with sales on 4-5 March with an expected amount of Dkr1.2bn.

The offering of Danish krone ARM bonds is set to peak around 4-7 March, said Olesen, while the offering of euro-denominated bonds is concentrated in the first auction week.

Bonds with a one year refinancing period make up the largest proportion of the Danish krone auction volumes, at 76%. However, the share of one year ARM bonds is continuing to decline, with Olesen noting that it stood at 86% and 96% at April auctions in 2012 and 2011, respectively.

And while no five year interest reset bonds are maturing at the upcoming April payment date, Dkr20bn of five year RTLs [Danish fixed rate mortgage bullets funding ARMs] are due to be auctioned over the coming weeks, amounting to 11% of total Danish krone volumes offered. That compares with shares of 4% and 1% in 2012 and 2011 April auctions, respectively, said Olesen.

“Thus there is a clear tendency that borrowers are to an increasing extent choosing to refinance further out on the RTL curve,” he said, adding that this should been seen in the context of a lending rate increase from 0.20% to 0.30% on 24 January, slightly more than a week before the deadline for borrowers changing interest reset profiles and prepaying loans.

Nykredit will this year hold its first auction of bonds for the refinancing of ARMs with a 1 July interest rate adjustment date, adding a fourth auction period to the calendar in a bid to spread refinancing risk.

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