Realkredit Danmark (RD) took the unprecedented step of cutting a three year covered bond auction from Dkr2.72bn to Dkr1.90bn (Eu255m) yesterday (Wednesday), citing dissatisfaction with orders for the sale, in an incident an analyst said was not wholly surprising given wider developments.

RD began Dkr65.4bn of sales on Monday as part of more than Dkr165bn of auctions by Danish lenders this week and next, mainly to refinance adjustable rate mortgages (ARMs), and until yesterday its sales had progressed smoothly, albeit at slightly wider levels than Nykredit Realkredit, the biggest mortgage lender, and BRFkredit, which is raising just over half RD’s amounts.

Danske subsidiary RD then announced yesterday that it was cutting the size of a scheduled Dkr2.72bn sale of a three year bullet (ISIN DK0009295651) to Dkr1.90bn. It said that it would instead raise Dkr3.13bn today (Thursday) and tomorrow, to achieve the Dkr13.6bn it had been seeking from the outset.

The issuer said in a statement that the decision to cut the size of yesterday’s auction was taken based on dissatisfaction with the quality of bids relative to the general market. The bid-to-cover ratio was given as being 2.19 by RD against the revised amount.

RD did not respond to enquiries before The CBR went to press, but it is understood to be the first time it has acted in such a manner, while another said that he could not remember any auction being cut for such a reason before.

An analyst noted that RD had from the start of the week been generally experiencing less demand than Nykredit. On Monday RD had sold Dkr2.72bn of the bond at a bid-to-cover of 2.54 while Nykredit on the same day sold Dkr1.2bn of its three year with a bid-to-cover of 5.08.

“The three year was all covered,” said the analyst, “but the problem was that some bids were too far away from what RD considered the ‘fair price’, so they cut off the lower bids.

“Fundamentally it is not a big problem,” he added, “but it did have a negative impact on the auctions.”

He said that the level at which RD sold the three year paper today – with a bid-to-cover of 4.20 – was some 4bp wider than on Tuesday, and that the widening had had a knock-on impact on sales from other issuers, even if they were less affected. A funding official at Nykredit said that its sales were going as expected.

Because of the pass-through nature of Denmark’s traditional mortgage finance model, higher funding costs are passed on directly to an issuer’s borrowers.

“You could say that from RD’s perspective they couldn’t care less because they pass on the cost,” said the analyst, “but the problem is that they lose competitiveness. You can argue whether what they did with the auction is fair or not vis-à-vis the investors.

“I believe what they did was right. Some investors who were just trying to pick up cheap paper will feel they have wasted their time, but they will just have to stay away or put in firm bids.”

However, he warned that such a problem should not be considered unexpected given that the Danish refinancing season is, in his view, increasingly complicated, with almost 100 auctions over two weeks, and investors now having to analyse new angles such as the LCR-eligibility of each issue.

“For many investors it has become close to impossible to keep track of everything,” said the analyst.

See coverage of the auctions from earlier this week here.