Nykredit Realkredit could launch its second euro benchmark Junior Covered Bond issue after finishing premarketing tomorrow (Wednesday) morning, while Realkredit Danmark has sold the instrument for the first time, having issued Dkr12bn (Eu1.61bn) through a series of sales.

BNP Paribas, DZ Bank, JP Morgan and Nykredit Markets have the mandate for Nykredit’s deal, which will be the issuer’s second Junior Covered Bond benchmark in euros, the first having been a Eu500m deal in October 2010. The roadshow takes in London today (Tuesday) before final discussions with investors in Copenhagen tomorrow.

Morten Bækmand, head of investor relations at Nykredit, told The Covered Bond Report it is seeking to build a public market for JCBs, targeting domestic and international investors. It is eyeing Eu1bn-Eu1.5bn of issuance this year, with a preference for maturities of three years and five years or longer. Nykredit has sold more than Dkr30bn (Eu4bn) of JCBs, so outstandings should surpass Eu5bn by year-end, said Bækmand.

Although two other traditional mortgage banks, BRFkredit and DLR Kredit, have issued JCBs before, until March neither of the country’s other two big players, Realkredit Danmark (RD) and Nordea Kredit, had done so. However, Realkredit Danmark on 28 March began issuing across six different bonds ranging from two to five-and-a-half years via parent Danske Bank.

Unlike Nykredit’s JCBs, Realkredit Danmark’s issuance is unrated, and it has also avoided using the Junior Covered Bond term, instead describing the instrument as senior debt issued pursuant to section 33e of the Danish legislation.

JCBs are issued under Section 33e of Danish covered bond legislation to add an additional layer of support to the capital centre (H, in the case of Nykredit’s latest issue) of the mortgage bank if the market value of assets therein declines and breaches LTV limits. Proceeds of JCBs are invested in high quality assets (including government bonds and covered bonds) and included in the cover pool.

As well as having a secondary claim over the assets in the capital centre and a residual claim against the mortgage bank ranking pari passu with other senior unsecured creditors, holders of JCBs are expected to be exempt from forthcoming European Commission bail-in regulations, with the Danish central bank governor and Minister of Economic & Business Affairs having argued thus in a letter to the EC.

S&P’s A+ rating of the JCBs is nevertheless at the same level as Nykredit Realkredit’s rating. The rating agency said that overcollateralisation cannot be managed in the same way as for standard covered bonds, and that upon issuer default payments on the bonds would be deferred until such time as the senior covered bond holders can be guaranteed payment.

However, S&P acknowledged the extra security offered by JCBs versus senior unsecured debt.

“We note that Section 33e bonds rank junior to the traditional (senior) covered bonds but rank senior to senior unsecured debt of the issuer for funds from the associated capital centre,” said the rating agency. “We are aware that any surplus of the cover pool after making payments to covered bonds and section 33e bonds will be transferred to the bankruptcy estate. Not until then will the senior unsecured creditors have access to assets from the cover pool.”

According to Alexander Ulrich, vice president, DCM, at DZ Bank, pricing of Junior Covered Bonds takes both asset classes – senior unsecured and covered – into consideration.

“The inaugural euro benchmark priced more towards a senior deal, which at the time reflected the novelty and pure rating of the product,” he said.

Nykredit Realkredit does not issue senior unsecured paper, but Nykredit Bank and the inaugural JCB provide good references, he added. The October 2014 JCB has been trading at around 150bp over, according to screen prices. A five year issue among Realkredit Danmark’s issuance was sold at six month Cibor plus 135bp.

Nykredit investor relations manager Kim Brodersen says the bank found demand for Junior Covered Bonds to be strongest away from the traditional covered bond investor base in the previous deal.

“The buyers of our original Danish krone Junior Covered Bonds were those invested in Nykredit covered bonds, some of whom were reducing their exposure in SDOs and buying JCBs instead,” he says. “We therefore thought when going outside Denmark that we would see a similar approach, but this was not the case.

“Covered bond investors were simply looking for the very highest quality or had mandates that would not allow them to look at JCBs, so the next move on our side was to go to credit investors, and they were much more interested in the product.”

Bækmand said that this included typical buyers of senior unsecured paper as well as MBS investors.

“That was a completely different story to the covered bond investors,” he said. “They really understood the product and the only reservation they had was that, being a new asset type, liquidity would be low.”