Foreign demand and issuance highlighted amid Danish sales
Bids were strong throughout the latest Danish refinancing auctions, with non-domestic investors in particular finding value, as Nykredit hailed improving recognition of its euro FRNs and Realkredit Danmark priced a Skr4.35bn issue with the slimmest pick-up versus domestic paper in recent years.
The latest Danish auction season began on Wednesday of last week and concluded yesterday (Thursday), with issuers offering a total of around Dkr67bn (Eu9bn) of Danish krone bullets – the majority of which are for one year adjustable rate mortgages (ARMs) – and around Dkr40bn of floating rate notes.
Nykredit was the first issuer into the market and its sales concluded yesterday, its bond offering comprising Dkr40.5bn in bullet covered bonds and Dkr35.9bn in floating rate bonds.
“We had very healthy bid-to-covers, especially in the beginning of the auction period,” said Morten Bækmand Nielsen, head of investor relations at Nykredit. “They did start to tail off a bit later in the process, but there were still very decent bids – for Nykredit specifically and for the other banks in general.
“Since we started our auctions slightly earlier, we especially benefitted from the fact there was good demand in the first few days, where we typically saw bid-to-covers of around 5:1.”
DLR Kredit offered Dkr5bn across one to five year ARMs in auctions on Thursday and Friday of last week. BRFkredit held its sales from Monday to Wednesday, offering Dkr6.3bn of ARMs across one, two and three year issues, and Dkr4bn in a July 2019 three month FRN on Tuesday. Nordea held its auctions from Tuesday to Thursday, offering Dkr14.1bn of one to five year ARMs and Eu130m in euro-denominated one year bonds.
Market participants said that demand had remained strong even at historically tight spreads because the bonds offered good value for international investors, and noted there had been a particularly strong bid from non-domestic accounts.
“For banks it still makes sense to buy these short-dated paper for liquidity portfolios,” said Nielsen. “For leveraged accounts – hedge funds and so on – it is becoming a little bit tight, at least if you have to do your funding in Danish kroner.
“However, we have seen very healthy demand from foreigners, due to the basis swaps – especially into dollars. If you are a dollar investor and buy these bonds in Danish kroner and swap them into dollars, you get a significant pick-up. That has been very helpful for the demand.”
Throughout the auctions, the largest bids were for the three year ARMs, which were seen as offering the best value. Nielsen noted that bid-to-cover ratios for the three year ARMs averaged around 5:1, compared to 3:1 for the one and five year ARMs.
Bankers said the strong demand was also supported by the relatively lower volumes of bonds on offer. Around Dkr150bn of Danish covered bonds are expiring, while only Dkr107bn is being refinanced. Analysts said declines have taken or will take place in callables, longer dated ARMs and floaters, while a small portion is attributable to loan repayments.
Nykredit sold two euro-denominated bonds, a Eu600m January 2019 issue priced at 40bp over Euribor and a Eu290m January 2018 issue priced at 33bp. The deals attracted bid-to-cover ratios of 3:45 and 3:44, respectively.
“One very positive surprise was that the euro floaters we had to sell saw a significantly better bid than the last time we auctioned that type of paper last year,” said Nielsen. “It was a bond that was probably a little bit overlooked the last time we auctioned it, but this time we saw a lot more interest, and the spreads were outperforming substantially.
Nielsen noted that the Eu290m January 2018 issue is not eligible for LCR Level 1B – unlike the larger issue – and is callable, but still attracted substantially higher demand.
“Even though they were only Level 2A, we were able to sell those bonds at 33bp over Euribor, less than half the spread compared to last time,” said Nielsen. “It is a very positive development.”
Nordea also offered Eu130m in euro one year bonds.
Market participants noted that the current auctions set record-low borrowing costs – with borrowers refinancing mortgages backed by the one year ARMs receiving an interest rate of minus 0.05%, the three years minus 0.01%, and the five years plus 0.19%.
“The absolute interest, which includes the cost of selling the bond, that we have been able to give to our customers are at record lows in this auction,” said Nielsen. “Danish homeowners and our corporate clients are very satisfied with the results.
“If you have one of these one year adjustable rate mortgages the interest rate for the customer is now minus 5bp. There are margins on top of that, of course, but the raw interest rate is negative.”
Realkredit Danmark yesterday (Thursday) sold a Skr4.35bn (Dkr3.42bn, Eu459m) October 2020 issue, refinancing an outstanding Swedish krona bond due 1 October 2016.
Following investor meetings in Stockholm on Tuesday, lead Danske – Realkredit Danmark’s parent – launched the deal at 9:20 CET with guidance of the high 50s over three month Stibor.
After less than two hours, guidance was revised to 53bp plus or minus 2bp will price within range, on the back of books approaching Skr14bn. The deal was then re-offered at 51bp.
The leads said that the deal was priced only 18bp wider than domestic Swedish mortgage bonds, which they said is the lowest premium in recent years.
Accounts in Sweden were allocated 55% of the deal, Denmark 43%, and others 2%. Banks bought 40%, asset managers 34%, pension funds and insurance companies 22%, and others 4%.