Denmark’s new covered bond auction season starts on Monday, with muted price reactions to new negative Moody’s reviews suggesting that the rating agency’s latest actions will have a limited impact, although  DLR Kredit is seen as vulnerable.

It placed on review for downgrade programmes of Danske Bank, DLR Kredit, Nykredit’s Realkredit and Totalkredit, while Danish issuers were also caught up in a series of bank rating actions by Moody’s last week.

Nykredit will begin selling Dkr95bn (Eu12.8bn) in Danish krone bonds and Dkr14bn equivalent in euro bonds on Monday for capital centres H, D and G, all of which were put on review for downgrade in Moody’s actions. Covered bonds issued out of its capital centres H and D are rated Aa1 by Moody’s, while bonds for capital centre G are rated Aa3.

Jesper Berg, senior vice president at Nykredit, said the initial reaction to Moody’s rating action last Thursday was difficult to see in terms of pricing.

“We would expect the impact to be quite limited,” he said. “Over the past couple of months Danish covered bonds have been seen as among those benefitting from a flight to quality, and spreads have been very low.

“It is not something which has had a significant impact.”

He added that if there were any negative moves in Danish covered bonds then that would be more of a result of a marginally more optimistic view on Greece slightly reversing the previous flight to quality.

An analyst also said he did not expect the Moody’s reviews to have a large impact.

“Even if Nordea is downgraded, it will not have any effect on the covered bond rating,” he said. “If DLR Kredit’s and Nykredit’s issuer ratings are downgraded, their covered bonds may be cut too.

“However, it is important to note most Danish investors are, for historical reasons, able to buy covered bonds with low ratings or without any rating at all, and DLR Kredit comprises almost entirely domestic investors.”

He also noted that the Financial Stability Company (Finansiel Stabilitet) – a state owned entity formed in 2008 to support financial stability, including winding up distressed banks – is one of the largest shareholders in DLR Kredit.

“The Danish government is thus behind a significant number of the extensive but complex loss guarantees,” he said, “which include most of DLR Kredit’s mortgage loans, meaning investors possibly facing real losses are therefore very limited in number.”

Nordea will be the second issuer to enter the March auctions, next Tuesday, selling Dkr11.88bn in Danish krone bonds (Dkr9.9bn in the one year maturity and Dkr580m in the two year) as well as Eu150m in euros.

Jens Peter Sorensen, chief analyst at Danske Bank, Realkredit Danmark’s parent, said that although he expected Moody’s reviews to have little impact on the auctions, he is concerned that DLR Kredit could have a minor setback as a result.

“Realkredit Danmark is selling our mortgage covered bonds, and [Realkredit Danmark] is not rated by Moody’s, so it will not be affected,” said Sorensen, “and most of Nykredit’s bonds are rated Aa1, so their ratings should not change, although they might have to put more overcollateralisation in their capital centres.

“I’m only concerned about DLR Kredit’s issuer rating and this could affect the rating of covered bonds issued by the bank because if it gets downgraded, they could get seriously downgraded.”

Moody’s put on review for downgrade covered bonds issued out of DLR Kredit’s capital centre B and general capital centre, both rated Aa1.

DLR Kredit will be issuing its bonds out of capital centre B during the auctions, likely selling Dkr4.8bn in kroner and Eu840m in euros on four days between 1 and 9 March, according to preliminary numbers from Henrik Højby, group treasurer at DLR Kredit.

Sorensen at Danske Bank said based on their Timely Payment Indicators (TPIs), Moody’s could downgrade the programmes by up to three notches.

“DLR might have to put up so much overcollateralisation that it could make it difficult for them to maintain a Aa rating,” he said. “I could see this resulting in a wider spread for the bank’s covered bonds.

“But even though the situation is not good, I’m not in panic mode, because I think DLR Kredit will just ‘dump’ Moody’s if this happens, as we saw with BRFkredit.”

Danske Bank was put on review, but Moody’s does not rate Realkredit Danmark’s programmes, so Sorensen said Realkredit Danmark should not be affected.

Højby at DLR Kredit does not believe there will be a change in the relative spread between Danish issuers as a result of Moody’s action.

“When you talk to Danish investors, they know the situation with Moody’s well,” he said, but he acknowledged foreign investors might take a closer look.

According to Højby, DLR Kredit would probably add more collateral to the cover pool to maintain the rating if necessary, but no decisions had been made yet.

“We will wait for Moody’s to come up with a final judgement before we will make any decisions of adding more collateral to the cover pool,” he said.

He also said severing a relationship with Moody’s was not something DLR Kredit was considering for the time being.

Realkredit Danmark is offering Dkr45bn in Danish kroner and Eu500m in euros between 12 and 16 March.

He added that he expected bonds to be sold more expensively this year than last March.

“We’re just flooded with liquidity,” said Sorensen. “We have a lot of prepayments, coupons, and redemptions coming up on 1 April, and then there are three year LTROs from the Danish central bank where banks can pledge part of the loan book.

“We will be awash with liquidity.”

The Danish central bank announced its own three year lending facility on 16 January that it will be offering on 30 March and 28 September.

Nykredit first vice president Lars Mossing Madsen said that what was interesting about the largest mortgage bank’s auction this year is that it was issuing a fairly large amount in three year and five year maturity brackets.

“Today it is possible to refinance three and five year loans at more or less the same level as the one years in March 2011,” he said.

The issuer is putting on the market Dkr4bn (up from Dkr1.3bn last March) in five year bonds, Dkr10n (up from Dkr1.3bn) in three year bonds, and Dkr72bn (Dkr66bn) in the one year maturity.

Madsen added that he could not see why the level of participation would not remain the same as in the December auction.

An official at BRFkredit told The Covered Bond Report it will not be participating in the auctions.