Bonds to refinance ARMs have been sold at record low yields and spreads since the latest Danish auction season began yesterday (Monday), with this being attributed to lower supply and planned changes to ARMs. Nykredit was also out with a Eu500m senior secured issue today.

Regulatory and rating agency concerns about risks related to Denmark’s adjustable rate mortgages (ARMs) have spurred the country’s lenders to promote alternative products – including traditional fixed rate callables and new Cita-based products – resulting in a reduction of the proportion of their lending that is ARMs.

Meanwhile the Danish government two weeks ago announced plans for forced extension of ARMs in the event that an auction fails or interest rates rise more than 5%, and the impending change led market participants to suggest that the latest auctions would be boosted because they will be grandfathered and the last before the switch (see below for more).

Nykredit Realkredit, Denmark’s biggest mortgage lender, held the largest one year ARMs sale yesterday, achieving a yield of 0.19% and bid to cover of 3.38 times on its Dkr6bn (Eu804m) SDO auction. It was also out with a Eu500m senior secured deal today (see below for more). Realkredit Danmark (RD) sold Dkr10bn over the morning sessions yesterday and today (Tuesday), achieving bid-to-covers of 3.83 and 3.41 times, respectively.

According to Lars Mossing Madsen, chief dealer at Nykredit Realkredit, the level achieved against swaps on one year ARMs bonds – 7bp over Cita in kroner and around 10bp over Eonia in euros – are the tightest since at least 2008.

“They are going extremely well,” he told The Covered Bond Report. “We are back to pre-Lehman levels relative to swaps on the major part of the bonds.”

He said that levels were also around 5bp tighter than pre-auction levels, with bid to covers also high, with the same being true in three and five year sales.

“It seems that interest in buying mortgage bonds before the coming changes is huge,” he added. “We can’t be sure that’s the reason for the demand, but since the changes were announced interest has been growing and growing.”

Uffe Kalmar Hansen, senior analyst at Nordea Markets, attributed the levels to a function of supply and demand, noting the amount of one year ARMs on offer throughout the auctions, for example.

“We are close to, if not at, all-time lows,” he said. “If we are looking for reasons for that, it is that the amount is significantly less than last year and this of course creates additional demand.”

Collectively, BRFkredit, DLR Kredit, Nordea Kredit, Nykredit Realkredit and RD have announced plans for Dkr177bn of one year ARMs sales.

Nykredit’s Madsen noted that the demand was being enjoyed by all the mortgage credit institutions that have been active so far, with BRFkredit and DLR Kredit issuing at levels closer to Nykredit and RD than in the past, achieving pricing only 0.5bp-2bp wider.

Nordea Kredit begins its sales next Monday and the auctions will draw to a close on Friday, 29 November, when Nordea and RD conclude their sales.

Coupon changes for postponed ARMs plan

The Danish government is understood to have yesterday agreed to postpone planned changes to ARMs bonds from 1 January to 1 April 2014, after having last week made changes to what will happen to the interest rates of bonds that extend under the plan.

On 6 November the Danish Ministry of Business and Growth unveiled proposals whereby ARMs bonds will automatically extend to match the maturity of underlying mortgages if an auction fails or if the rate on the relevant auction is more than 5% higher than previously. Under this plan, the coupon would be fixed at a level 5% higher than previously for the remaining term of the bond.

However, The CBR understands that investors’ concerns over the proposed structure and the complexity of pricing it have led to a change in the draft legislation whereby the coupon will be reset every 12 months to reflect the development of interest rates.

An industry spokesperson said that issuers remain broadly supportive of the change but are discussing technical details with the ministry ahead of the expected publication of proposed legislation next week. He said that the postponement of implementation until 1 April was requested by the mortgage banks to allow difficult technical considerations to be worked out, noting that 1 January is “very soon”.

Nykredit in capital centre D senior secured

Nykredit Realkredit will price a Eu500m long five year senior secured issue at 70bp over mid-swaps today. Leads BNP Paribas, HSBC, Natixis, Nykredit and UniCredit gathered some Eu800m of orders for the deal, which was initially marketed at the low to mid-70s over before guidance was set at the 72bp over area.

A lead syndicate banker said that Nykredit senior secured May 2018s were trading at around 60bp over, with the new issue premium on today’s issue amounting to around 5bp over.

He said that around 85 accounts participated in the transaction, noting that investors’ perception of Danish credit has improved. Today’s deal comes after a roadshow last week.

The January 2019 issue is Nykredit’s first euro senior secured benchmark where the proceeds are being used for covered bond overcollateralisation purposes rather than, as previously, for CRD compliance reasons. It has in the past issued senior secured debt in euros out of capital centres used to issue CRD-compliant covered bonds. Instead, today’s deal is out of capital centre D, which is used to issue Realkreditobligationer (ROs), which are not CRD-compliant. (See here for more.)