One year still the Danish focus but RD preps Cita alternative

Aug 8th, 2013

Nykredit will launch its August refinancing auctions next Thursday, with one year ARM bonds dominating after a smaller than expected take-up of longer interest reset periods. Meanwhile, Realkredit Danmark is launching a Cita product aimed at addressing concerns about refinancing risk.

NykreditNykredit Realkredit is planning to offer Dkr120bn (Eu16.1bn) of bonds for the refinancing of adjustable rate mortgages (ARMs) and Cibor and Euribor-linked loans, split between Dkr89bn of Danish krone denominated fixed rate mortgage bullets and Dkr31bn equivalent in floating rate mortgage bonds.

The majority of the bonds being auctioned are one year ARM bonds — some Dkr77bn will be up for sale from next Thursday until 29 August. The next largest component of Nykredit’s ARM bond auctions are three year bonds, of which nearly Dkr6bn are being offered, followed by Dkr4bn of five year bonds.

Lars Mossing Madsen, chief dealer at Nykredit Realkredit, pointed out that a sizeable offering of floaters is scheduled for 22 August, when Dkr19bn of three year floating rate mortgage bonds from Capital Centre H will be auctioned, alongside Dkr4bn of realkreditobligationer (ROs) from Capital Centre G, and some Eu1.1bn of euro denominated two and three year floaters.

“Nykredit is the main part of issuance in the September auctions,” he told Nordic FIs & Covered, noting that one year bonds are dominating as most borrowers shunned the opportunity to switch to longer interest reset periods.

“There has been a limited move from one year bonds to longer maturities, definitely much less than expected,” he said.

This could have to do with the holiday season, he speculated, as borrowers have to make refinancing decisions before 1 August, which coincides with the peak holiday time.

Madsen’s overall expectations for the auctions are positive.

“I don’t expect problems distributing the bonds and expect they will trade around the secondary levels of our tap sales,” he said.

This would put one year bonds in the 20bp over Cita area.

Joining Nykredit in issuing bonds with an October refinancing date will be BRFKredit, DLR Kredit and Nordea Kredit.

Neither BRFkredit nor DLR Kredit have announced details of expected offerings, but Jan Weber Østergaard, senior analyst at Danske Bank, estimates issuance of around Dkr18bn, mostly one year bonds, from BRFkredit and some Dkr15bn, almost solely one year bonds, from DLR Kredit.

Nordea Kredit has announced that its auction will run from 27-29 August, while Realkredit Danmark does not have any bonds up for refinancing this October.

Expectations are for spreads on one year bonds up for auction to be in line with prevailing levels, according to Østergaard, namely around 6bp through three month swaps and 21bp over Cita.

Three year and five year ARM bonds are trading at 6.6bp and 25.4bp through swaps, respectively, at the moment, he said.

“These spreads are tighter compared with the March auctions, but they could widen a couple of basis points during the auctions,” he said.

This could be because of anticipation of higher issuance of longer dated ARM bonds in the months ahead, said Østergaard, noting that Standard & Poor’s recently lowered the outlooks on several Danish banks’ ratings because of concerns over their funding profiles. (See here for previous coverage.)

BRFkredit, DLR Kredit, Nykredit Realkredit and Danske Bank were affected by S&P’s move, with the rating agency citing large asset-liability mismatches among other factors.

“S&P is concerned about a reliance on short term funding, which is putting a bit of pressure on Danish mortgage banks to push borrowers further out the FlexLån curve or into 30 year fixed rate callable loans,” said Østergaard. “Issuance of longer dated ARM bonds could be higher, which could put some pressure on three and five year covered bond spreads.”

Cita ‘joker’ awaited

Meanwhile, plans by Realkredit Danmark to introduce a new type of mortgage product in Denmark this autumn will be closely watched, according to Østergaard.

09-04-2013 - Realkreditforeningens rsm¿de afholdes i Stakkeloftet, Operaen, K¿benhavn.The mortgage credit institution last Thursday (1 August) announced that it is launching a new product based on the Cita rate as an alternative to FlexLån loans with short interest reset intervals and to Cibor loans. It is based on three year bonds and will feature semi-annual interest rate resets.

Speaking on the occasion of the release of Realkredit Danmark’s H1 2013 interim report, Carsten Nøddebo, chief executive officer (pictured), said that the loan “will be a competitive alternative to the current F1 and F2 type loans”.

“This loan type will offer customers the option of short interest reset intervals,” he said. “But it will also support the robustness of the mortgage finance system because the refinancing risk is considerably lower than the risk on the current F1 and F2 loans since the bonds have longer maturities.”

The mortgage credit institution referred to S&P’s July outlook change on its parent Dankse Bank, from positive to stable, and said that it will continue to try to reduce the volume of loans with short interest reset intervals to address the rating agency’s concerns about high funding risks in Denmark as a result of mortgage lending with annual interest rate adjustments.

S&P at the end of June said that stable funding requirements under CRD IV could drive lenders toward longer dated bonds and loans over time, and that the Danish government will from January 2014 require that lenders offer floating rate mortgage products linked to the Cita reference index. (See here for previous coverage.)

Danske’s Østergaard said that Realkredit Danmark’s new mortgage product will not have an effect on the August refinancing auctions, but that it is something of a “joker” with respect to the end-of-year auctions.

“It will be a big theme in the market this autumn,” he said.

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