Realkredit Danmark will establish a new capital centre for the financing of its adjustable rate mortgage (ARM) loans and terminate its collaboration with Moody’s, it said yesterday (Thursday), because of fundamental disagreements with the rating agency. The news comes after Nykredit announced an action plan on Tuesday.

Realkredit Danmark will finance new and pre-existing loans through its new centre, while the existing capital centre will finance fixed rate loans and variable rate loans with a rate cap.

Realkredit Danmark, Aarhus

“[Realkredit Danmark] believes that this step will help make the Danish mortgage finance system more secure in the future and make it more robust against large fluctuations in the economy and in the financial markets,” said the issuer.

The bank has decided it will no longer work with Moody’s after the rating agency increased refinancing margins for Danish programmes and lowered its Timely Payment Indicator from “very high” to “high” for covered bonds from BRFkredit, DLR Kredit. Nordea Kredit, Realkredit Danmark, and Nykredit Realkredit on 10 June.

“The decision was taken because Moody’s, as a result of its model calculations, demanded that Realkredit Danmark provide an additional excess cover of Dkr32.5bn (Eu4.36bn) if it wanted to keep its current AAA rating,” said the issuer. “Realkredit Danmark has discussed the fundamentals of the matter with Moody’s in order to understand the rationale behind its rating model, but has concluded that the parties disagree about the fundamentals.”

Realkredit Danmark said that it is in the position to provide excess cover through the issuance of junior covered bonds or through a loan from its parent, Danske Bank.

Realkredit Danmark retains a AAA rating with Standard & Poor’s, and it noted that Moody’s methodology differs from those of other rating agencies. It said that it will seek to achieve the highest possible rating for its new capital centre.

Nykredit plan to support existing issues

A plan to implement five operational changes in preparation for future market conditions announced by Nykredit on Tuesday was in large part due to Moody’s stance, according to Gustav Smidth, senior analyst at Danske Bank.

“A big part of the explanation for this move by Nykredit is the Moody’s rating action,” said Smidth, who believes the operational changes will have a limited effect in the short term.

“I think we will see some of the other mortgage banks looking into this solution from Nykredit,” he added. “Perhaps they won’t do the exact same thing as what Nykredit is doing, but they will definitely look into how Nykredit is doing these changes and how Nykredit is reacting.”

One of the initiatives involves the introduction of two tier mortgaging, which will reduce the additional collateral requirement in case of declining property prices.

“Part of mortgage loans – probably up to a 60% loan to value ratio – will continue to be granted in compliance with the rules governing SDOs,” said Nykredit, “while the top part of mortgage loans up to an 80% LTV ratio will be granted according to the rules governing the traditional mortgage bonds (ROs).”

Smidth said that Nykredit’s plan should be supportive of outstanding issues.

“The first consequence of these initiatives will be slightly positive for existing covered bonds,” said Smidth, “as we know that all existing bonds in the capital centres with longer maturities will have a more secure pool with lower LTV values over time as new loans will be granted with LTVs with up to 60% and the rest, from 60%-80%, will be granted in a RO capital centre.”

Nykredit, ahead of Realkredit Danmark’s move, also said it will create a special capital centre for bonds funded by adjustable rate mortgages.

“The new capital centre for these adjustable rate mortgages,” said Smidth, “it could get a triple-A rating, but the outlook on that is still unclear as we’ll have to see how Moody’s and S&P will react to a capital centre that 100% consists of adjustable rate mortgages.

“The financing cost is being transferred directly from the bondholders to the loans,” he added, “so this increased capital risk, some of that payment will be passed through to the borrowers. The issued bonds will be safer in that respect.”

Smidth said Nykredit would be able to now raise the payments it receives from borrowers, not through bondholders, but through the premium that goes directly to the bank.

“I think they were not allowed to raise the premiums on Nykredit loans but they could on Totalkredit, which they bought in 2005, so that means they will be able to raise premiums on 30%-40% of their loan books,” he said.

“That means better capitalisation for Nykredit itself, which is also a positive for the bondholder. Of course the borrower faces a higher rate of pay, but for the bondholder, it should be positive.”