Moody’s put rating and spread pressure on Danish covered bonds this (Friday) morning by cutting three Danish mortgage credit institutions’ issuer ratings. But despite this, and its concerns over Danish adjustable rate mortgages backing covered bonds, the rating agency said that the country’s framework is amongst the strongest in Europe.

Nykredit Realkredit (as well as Nykredit Bank) was cut from A1 to A2, DLR Kredit from A3 to Baa1, and BRFKredit from Baa1 to Baa3.

A BRFKredit official this morning told The Covered Bond Report that the issuer was preparing a statement to the Copenhagen Stock Exchange.

Danske Bank analysts described the BRF downgrade as very negative. However, they said that the impact on Nykredit should be limited, in line with three to five year Nykredit bonds losing a few basis points today.

“We have seen some initial market weakness on the back of this, with the news this morning” said a syndicate official in Copenhagen. “We have to wait and see how the market will react. It’s too early days to know.

“Any weakness that has been perceived has been seen as a buying opportunity for domestic investors,” he added.

Covered bonds issued out of BRFKredit Capital Centre E were downgraded from Aa1 to Aa2, with a combination of the new Baa3 issuer rating and a Timely Payment Indicator of “high” constraining the covered bonds’ rating at the lower level. Danske’s analysts said that a further one notch downgrade of the issuer would imply a drop in the covered bond rating to A2.

Last week Realkredit Danmark, part of the Danske group, said that it would no longer work with Moody’ s, saying that it disagreed with the fundamentals of the rating agency’s model.

In contrast, Nykredit had set out changes to its operations aimed at sustaining high ratings as well as dealing with other pressures facing the Danish mortgage model.

“The downgrade of Nykredit’s ratings is unsatisfactory,” said Peter Engberg Jensen, group chief executive of Nykredit today, “but was expected given the downward pressure on ratings of financial institutions in general and in Denmark in particular, as well as the constraints on Nykredit’s possibilities of raising administration margins.

“I have taken note that Moody’s recognises Nykredit’s latest steps to secure long term financial stability, but await the tangible effects from these measures.”

Moody’s announced new overcollateralisation levels for Danish covered bonds to be commensurate with current levels, but Nykredit said that these did not take into account the issuer’s plans.

“Discussions are ongoing between Nykredit and Moody’s on the overcollateralisation levels needed in light of the announced changes,” said Nykredit in a statement.

Danske’s analysts said that they expect Nykredit to raise overcollateralisation to the level necessary to maintain a Aaa rating from Moody’s. They also anticipate DLR Kredit doing likewise to maintain its Aa1 rating.

Moody’s cited weakened profitability and financial strength, and refinancing risks when cutting the ratings of DLR Kredit and BRFKredit. The rating agency said that its downgrade of Nykredit Realkredit reflected concerns over its ability to maintain solid profitability levels.

The latest rating actions come after Moody’s last month increased refinancing margins for Danish covered bonds and cut their TPI from “very high” to “high”, a move that prompted Realkredit Danmark to end its relationship with Moody’s and raised tensions between the rating agency and the Danish mortgage community.

Today the rating agency released a special comment that stressed the strengths of the Danish mortgage model, saying that the impact of its actions should be viewed in the context of wider factors.

“The refinancing margins for Danish covered bond programmes remain the lowest in Europe,” said the rating agency. “The increase in minimum collateral as a result of increasing refinancing margins represents under 15% of total collateral increases for Danish covered bond programmes since the beginning of 2009. The remaining more than 85% has been due to the weakening credit strength of issuers.

“Despite weakening issuer credit strength and our assessment of increased refinancing risk, the position of Denmark as having one of the strongest covered bond frameworks in Europe has not changed. The relative strength of the Danish system is reflected in both the refinancing margins now used, which are the lowest in Europe, and Timely Payment Indicators (TPIs) which are amongst the highest in Europe.”

Moody’s said that it is issuer ratings that are the key driver of covered bond ratings.