Nykredit auction first under new refi law, impact ‘insignificant’

Nykredit sold some Dkr13bn (Eu1.74bn) of one year ARM bonds this week in the first auctions of covered bonds that feature maturity extension triggers in accordance with new legislation, and market participants said the auctions, although small, show demand to be largely unaffected by the changes.

The Nykredit Realkredit auctions took place from Monday to yesterday (Wednesday) this week, with bid-to-cover ratios stable around 3 (3.06 on Monday, 3.08 on Tuesday, and 3.09 yesterday).

The auctions were the first since a new law to combat refinancing risk came into force on 1 April for bonds issued by mortgage credit institutions to fund one year adjustable rate mortgages (ARMs), although the issuer has been selling bonds in accordance with the legislation since then. The bill comes into effect in January 2015 for maturities of more than 12 months and up to and including 24 months, and for mortgage bonds issued by banks.

The new legislation provides for the maturity extension of certain bonds and interest rate caps in certain circumstances. These are: if a refinancing auction fails; if an auction leads to interest rates that are 5% higher than the level a year before the auction; or if the issuer is under administration or any other bankruptcy proceeding.

The Nykredit group yesterday announced that on the basis of this week’s auctions of one year ARM bonds the interest rate trigger that would lead to a maturity extension at next year’s refinancing is 5.27%.

The bonds were auctioned at a yield-to-maturity of 0.27% on Monday and Tuesday, and 0.26% yesterday.

Lars Mossing Madsen, chief dealer at Nykredit Realkredit, said that although the auctions were small they nonetheless indicate that demand for the new type of bond is not weaker than that at previous auctions of bonds that did not incorporate maturity extension triggers.

“It seems the changes are well accepted,” he said. “As far as we can see there was no impact and the bid-to-covers are the same as before.”

He acknowledged that larger auctions taking place after the summer, which will include fresh supply from other mortgage banks, will be a better test of the impact of the refinancing legislation, but said that indications are that these should go well.

Others offered a similar take on the auctions.

Jens Peter Sørensen, chief analyst at Danske Bank, said that there was no real pricing impact from the inclusion of an interest rate trigger in the bonds, and that demand was also in line with that at previous auctions, before the introduction of the refinancing legislation.

“It was business as usual,” he said. “The new bonds came with a bit of a pick-up to the old ones without an interest rate trigger, but the pricing impact was not significant and bid-to-covers were very standard.”

The auctioned bonds came at around 19bp-20bp over Cita, which is some 3bp-4bp wider than where older issues, which do not feature an interest rate trigger, are trading, according to Sørensen.