DLR Kredit will this week for the first time issue senior secured debt pursuant to Section 33e of Danish covered bond legislation, selling up to Dkr4bn (Eu536m) of what have also been dubbed “Junior Covered Bonds”.

Danske and Nordea have been mandated to sell the bonds, which are being issued out of DLR Kredit’s Capital Centre B.

BRFkredit, Nykredit Realkredit and Realkredit Danmark have already issued such bonds, which rank junior to traditional covered bonds but senior to the issuer’s senior unsecured debt for funds from the associated capital centre. Holders of the senior secured debt also have a claim against the issuer that ranks pari passu with senior unsecured bondholders.

In line with its previous rating of such instruments, Standard & Poor’s has assigned the §33e bonds a rating equal to that of the issuer, in DLR Kredit’s case BBB+, on positive outlook.

§33e debt is used by Danish mortgage credit institutions to top up capital and add overcollateralisation when property prices fall and push up LTVs above regulatory limits. The proceeds of the issuance are invested in high quality collateral.

The additional funds necessary can be provided in other ways and Pernille Lohmann, investor relations manager at DLR Kredit, said that the issuer previously issued government guaranteed (GG) senior debt to this effect.

“We would like to redeem this,” she told The Covered Bond Report. “They mature next summer, but we would like to be out in good time.”

She said that the bank is considering selling a further Dkr2bn of the senior secured bonds in the spring.

Lohmann said that the issuer had been mentioning to investors the possibility that it could issue senior secured debt since earlier this year and then, after announcing third quarter results on 25 October, recently had an investor seminar. She said that, with all the other Danish issuers except Nordea now issuing senior secured debt, the concept is now well understood in the Danish market.

The choice of maturities for the issuance and pricing will be determined to take into account investor feedback, she added.

The sale is planned for this week, before DLR Kredit starts its December auctions on Monday.