Nykredit halves one year ARMs for auctions, builds up euro FRNs

Nykredit Realkredit has halved the amount of one year ARMs bonds it is selling when it kicks off the latest Danish auction season on Monday from Dkr74bn to Dkr37bn (Eu4.97bn) as its customers move towards longer dated mortgage products, and is building up euro FRNs in connection with this.

Like other Danish lenders, Nykredit has been incentivising its customers to take out mortgage products other than those adjustable rate mortgages (ARMs) that are refinanced through one year bonds because of regulatory and rating pressures.

As a result, half of customers with ARMs with corresponding one year funding have chosen to refinance with other mortgage products, according to Nykredit, which announced the halving of one year issuance to Dkr37bn from the initially announced Dkr74bn last Friday.

“We have made strenuous efforts to inform our customers of the less expensive, lower risk alternatives to ARMs with one year funding,” said Henrik Hjortshøj-Nielsen, executive vice president, group treasury, at Nykredit.

ARMs with one year funding represents only 2% of new loan offers from Nykredit, which characterised demand for such products as “almost non-existent”.

One year ARMs bonds will constitute 50% of the Dkr74.2bn of bonds being offered by Nykredit from next Monday (17 November) until 26 November, which is down from around 80% traditionally, according to Morten Bækmand Nielsen, head of investor relations at Nykredit.

“Due to the match-funding principle, the loan and funding must move together,” he said. “This means that the shift in maturity profile must be done in agreement with the borrowers, which again means that the process will be gradual and likely to continue over the coming years.

“For the Danish krone-denominated funding this will likely mean more three and five year bullet loans, but also some FRNs will come to the market.”

Some Eu4.2bn of maturing bonds are in euros and as well as three and five year issuance increasing, Nykredit will be issuing more floating rate notes.

Short three year and long four year FRNs are being sold in tap format, with an October 2017 expected to reach more than Eu500m by year-end and a January 2019, which already stands at Eu156m, to reach Eu500m over the coming three to six months.

Because the FRNs follow the Danish balance principle, there is a small pass-through element to repayment, with approximately 0.2% amortised each quarter.

“We recognise that for some investors this is not a plain vanilla product,” said Bækmand, “but this should be somewhat compensated by the pricing reflecting some premium over traditional bullet bonds. Ultimately, investors will have a triple-A CRR and UCITS-compliant covered bond that we expect will achieve Level 1B LCR treatment.

“We expect that some investors will see this as a good opportunity to obtain a little extra in terms of spread in this very low yield environment without compromising on the asset quality.”