Strong bid-to-covers for Realkredit Danmark in ARMs auction finale

Realkredit Danmark ended auctions of ARM bonds on a strong note last Friday (15 March), with its sale of one, three and five year bonds also bringing to a close the latest refinancing round by Dutch mortgage banks, with some Eu31bn equivalent of ARM bonds auctioned in total.

Realkredit Danmark (RD) was the only issuer auctioning covered bonds last week, with the others having already finished. It ended up auctioning Dkr42.2bn (Eu5.66bn) of one year Danish krone adjustable rate mortgage (ARM) bonds, Dkr11.15bn of three year bonds and Dkr10.3bn of five year bonds. It also sold Eu525m of one year euro bonds.

In total nearly Dkr228bn (Eu30.6bn) of RTLs (Danish fixed rate mortgage bullets funding ARMs) were auctioned, according to Bjørn Sebastian Olesen, analyst at Nykredit Markets, including Dkr181bn of one year bonds (Dkr26bn equivalent of which were in euros), and Dkr23bn and Dkr20bn of three and five year bonds, respectively.

One year bonds comprised nearly 80% of the total amount offered, with more than three-quarters more three year RTLs offered this April than at the 2012 April refinancing (Dkr13bn), added Olesen, and nearly three times as much in five year bonds (2012: Dkr7bn).

“The auctions, which began on 25 February and ran for three weeks, had an average bid-to-cover ratio of 2.6, which is unchanged on last year’s April refinancing,” he added. “However, the bid-to-cover ratios of three year and five year RTLs are lower this year.”

RD ended its auctions on a strong note. On Friday the bid-to-cover ratios on the supply of one, three and five year bonds were the highest of the issuer’s auctions, standing at 3.14, 4.37 and 6.28, respectively. The next highest bid-to-cover ratios were 3.01 for the one year bonds, on 4 March, RD’s first day of auctions, and 4.37 for the three year bonds on the first day these were auctioned, on 11 March, and 4.11 for the five year bonds, on Thursday, the day before the auctions ended.

Jan Weber Østergaard, senior analyst at Danske Bank, RD’s parent, highlighted that spreads on RD’s five year bonds tightened by 2.5bp versus three month swaps, while the one year and five year bonds tightened by 1bp.

“During the auctions, the spreads widened the first 10 days in general,” he said about RD’s bonds, “but in the last week spreads have almost tightened back to starting levels.”

Olesen at Nykredit Markets said that an initial decline in Cita and Eonia swap rates during the auctions caused a “marked” spread widening across issuers in the one year segment, with spreads on Nykredit Realkredit’s Danish krone denominated one year bonds in particular widening substantially versus Cita — from 20bp over at the beginning of the auctions to around 26bp over after 10 trading days.

Spread widening in three and five year RTLs was generally less pronounced, he added.

Nykredit was the biggest issuer at the auctions and on Friday, 8 March, wrapped up its sales of one year ARM bonds with a Dkr8.4bn (Eu1.13bn) offering. The bonds came at 25bp over Cita, with the bid-to-cover at 2.06.

Lars Mossing Madsen, chief dealer at Nykredit Realkredit, said that yields for mortgage borrowers are only marginally higher than those resulting from the December auctions despite spreads having widened during the course of the issuer’s February/March auctions.

“It’s normal to see a bit of spread widening during the auctions although this wasn’t so much the case in the December auctions,” he said. “This time we started on historically low spread levels, and they widened a bit.”

One reason for this is the large size of Nykredit’s auctions, he said, which comprised a one year ARM bond offering of Dkr77bn.

The most positive outcome of the auctions, according to Madsen, was the broad interest shown in the issuer’s mortgage bonds (realkreditobligationer, ROs), which it issues out of capital centres G as part of a two tier lending model.

“Since June 2012 we extended lending under this model to private borrowers and the take-up has been increasing,” he said. “There was huge interest in these bonds in the auctions, and the spreads tightened, in Danish krone and euros.

“The auctions have confirmed that investors accept the product.”

DLR Kredit finished its auctions on the same day as Nykredit, holding the last of three auctions of one year ARM bonds. It offered Dkr2.7bn, with the spread relatively stable, at 26.5bp over Cita, and the bid-to-cover standing at 2.65.