Nykredit and Realkredit Danmark will kick off the latest auction season on Monday and will be the most active of the Danish issuers.

Realkredit Danmark will between Monday and Friday offer Dkr58.345bn, including Eu145m in euro-denominated bonds. Nykredit expects to sell some Dkr33.7bn of covered bonds, comprising Dkr33.3bn in kroner and around Eu53.8m in euros, with its sales also concluding on Friday.

DLR Kredit will join the auctions on Tuesday and conclude its sales on Thursday, offering Dkr6.57bn in kroner and Eu120m in euros. Also between Tuesday and Thursday, BRFkredit will offer Dkr12.875bn of its RTL F bonds and traditional non-callable bullet bonds.

Nordea Kredit will be the last issuer to come to market, holding auctions on Wednesday and Thursday and targeting Dkr8.85bn of krone sales and one Eu50m bullet.

Analysts noted that the volume of five year ARMs supply is set to be a record high, with around Dkr30bn expected. The current record is the Dkr15bn sold in the final auctions of 2012, according to analysts at Danske.

“Not least, RD and Nykredit are selling many five year non-callables, but BRF will be issuing around an extra Dkr1bn in five year non-callables for the joint funding of Jyske Bank housing loans,” said the Danske analysts. “RD borrowers seem to have decided to move towards F5 ARMs – refinancing every five years – and we also expect Nykredit borrowers to increasingly prefer F5 ARMs to shorter-term loans – encouraged by the structure of administration fees.”

The prominence of three to five year issuance in the quarterly auctions has increased over recent years as increasing numbers of Danish borrowers have switched to longer dated loans, with lenders incentivising the shift, in response to regulatory and rating agency pressures.

The Danske analysts said the five year non-callables look the best value for investors at current levels.

“The big question is whether the market can sustain the issuance of around Dkr34bn in five year non-callable bullets at low spread levels,” they added. “Spreads could probably widen around 3bp-5bp during the auctions.

“We therefore recommend making cautious bids for five year – and three year – non-callable bullets at the start of the auctions.”

Frederick Nordsborg, head of fixed income research at Nordea Markets, said the trend towards higher five year supply will continue in the coming years, and said the spread impact of this could become more pronounced over the longer term.

“Given underlying market rates and relative value we do not see significant spread curve steepening at the auction,” he said, “but in a longer term perspective the spread structure could steepen in order to reflect the structural supply trends.”

Since the last auction season in November, spreads across all maturities have tightened by around 5bp versus swaps.

“Spreads are tighter than previously and the spread structure has flattened, which in principle suggests not going too far out on the curve, since hedged mandates see reduced value at current pricing,” said Nordsborg. “On the other hand the absolute yield level is higher and the potential roll down has improved significantly.

“This should drive enough demand to keep pricing at close to current levels, also given the relative pricing versus alternatives.”

According to Danske analysts, the Dkr148bn of supply compares with Dkr245bn of redemptions, resulting in “plenty of excess cash that needs to be reinvested”.

“Hence, we have seen ASW spreads on the non-callables tighten ahead of the auction,” they added. “Given the excess cash there is room for more tightening.”

A funding official at one issuer said the net fall in supply remains key.

“The total amount compared to the last decade is much, much smaller at these auctions, so I expect they won’t have a huge impact on the levels we see,” he added. “The prices we are going to auction at are not going to be that different from what you are seeing in the secondary market right now.”

Another analyst said that three and five year bullets had tightened against swaps more than the very short end in the past fortnight. He added that Danish bonds had in general reflected the global trend of wider yields since Trump’s victory last week, but that this had been primarily in longer maturities, whereas the bulk of the forthcoming supply is in maturities of five years or shorter.

“People are just going to get a little more yield than a couple of weeks ago,” he said. “Most likely we will see more interest in the longer maturities given the pick-up available.”

Danish krone covered bonds meanwhile remain cheaper than euro-denominated issuance taking into account the costs involved for any investors that might consider alternatives, he noted.

Realkredit Danmark’s opening sale this morning was Dkr13.85bn of a July 2021 floating rate note that a banker said was priced at around 50bp over Cita, while BRFkredit was due to offer an FRN afterwards, with Nykredit joining the FRN sales tomorrow (Friday) and notably including a 10 year.

ARMs refinancing’s next week include some Dkr90bn of krone-denominated sales, down from around Dkr160bn a year previously, according to an analyst, with Eu2.22bn of euro-denominated bonds also on offer. DLR Kredit and Nordea Kredit will be joining the other three Danish mortgage credit institutions in the ARMs issuance, while Nykredit and DLR Kredit will also be holding small associated sales in December.

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%.

The latest Danish auction season began yesterday (Wednesday), with a total of around Dkr67bn (Eu9bn) of Danish krone bullets – the majority of which will be for one year adjustable rate mortgages (ARMs) – and around Dkr40bn of floating rate notes due to be sold.

Nykredit was first into the market, selling Dkr4.9bn of one year bullets, Dkr2bn of three years and Dkr2bn of five years yesterday. The bullets were sold with bid-to-cover ratios of 2.94, 5.53, and 3.81, respectively.

“Hence, day one provided a good indication of demand for the different maturities,” said Jan Weber Østergaard, senior analyst at Danske. “All three maturities were sold at spreads tighter than the market pricing before the auction.”

Today (Thursday), the issuer sold Dkr2bn of three year bonds and Dkr2bn of five years, with bid-to-covers of 4.44 and 3.87, respectively.

DLR Kredit started its auctions today, offering Dkr1.7bn in one year bonds, Dkr90m in two years, and Dkr550m in three years on the first day of its auctions.

Market participants said the initial sales confirmed that demand is particularly strong in three years, as had been expected, with the maturity seen as offering the best value.

The sales had been expected to go well across the curve, given limited volumes and high demand.

“Prior to these auctions, these Danish covered bonds have performed a lot, no matter what you compare them to – euro covered bonds, Danish government bonds, and versus swaps as well,” said Anders Aalund, chief analyst at Nordea Markets. “But if you compare them to all those peers, they are still relatively cheap, even in spite of this performance.

“It is therefore not surprising that in the first days of the auction they have gone so well and are continuing their performance. The orders are fairly high, reflecting that they are simply one of the last spaces in Europe where you actually have some risk premium left.”

Bankers also said that demand was high because of the scarcity of other available covered bonds during the European holiday period, and because the total volumes available in the current auction is relatively limited when compared to the amount of bonds expiring.

Aalund noted that around Dkr150bn of Danish covered bonds are expiring, while only Dkr107bn is being refinanced. He said some of these declines have taken or will take place in callables, longer-dated ARMs and floaters, while a small portion is attributable to loan repayments.

“A lot of bonds have disappeared – some of which will come after and some of which will come later – but the auction amounts are much lower than what might have been expected to be sold,” he said.

Nykredit will hold further auctions every day until next Thursday (25 August). Nykredit’s bond offering comprises Dkr40.5bn in bullet covered bonds and Dkr35.9bn in floating rate bonds.

DLR Kredit will offer Dkr5bn, with its auctions concluding tomorrow (Friday), when it will offer a further Dkr1.7bn of one years, Dkr225m of four years, and Dkr750m of five years.

BRFkredit will hold its sales from next Monday to Wednesday, offering Dkr6.3bn of ARMs across one, two and three year issues. The Jyske subsidiary will also offer Dkr4bn in a July 2019 three month FRN on Tuesday.

Nordea will hold its auctions from next Tuesday to Thursday, offering Dkr14.1bn of one to five year ARMs and Eu130m in euro-denominated one year bonds.

Realkredit Danmark will meanwhile hold investor meetings on Tuesday ahead of a Swedish krona-denominated refinancing of an outstanding bond due 1 October 2016 (ISIN DK0009291239).

Whereas the last round of auctions in May focussed on FRNs, the majority of sales in the current auctions are ARMs, with Nykredit’s and BRFkredit’s offerings next week the only floaters to be sold. Bankers expect the bonds to perform well, thanks to an attractive pick-up versus the traditional ARMs.

“The floaters for sale, which mainly have three year maturity, look quite attractive in our opinion given a pickup of around 8bp against non-callable bullets,” said Østergaard. “We expect solid demand for floaters at the auctions, as they offer value relative to short non-callable bullets even for outright investors.”

Østergaard added that liquidity in the FRNs has improved considerably in the past year.

In May, Nykredit announced plans to cut its ARMs auctions from four times to twice a year in a bid to offer fewer but larger lines of covered bonds to meet LCR Level 1B eligibility criteria, and other issuers are also working on rearranging their auctions.

“We haven’t seen any effects or pricing benefits from that yet,” said Aalund. “That will come gradually over the coming terms or years.”

The Danish mortgage industry and country’s authorities lobbied hard for covered bonds to be treated favourably in EU Liquidity Coverage Ratio criteria, but although they were successful implementation of the requirement has led to increasing divergence in the Danish market, with issues hitting a Eu500m or Dkr3.75bn threshold for Level 1 LCR treatment trading tighter than those that are only eligible as Level 2A assets.

A market participant said that the spread between Level 1B and 2A series is around 5bp for one to five year bonds refinancing ARMs, while some issuance that does not even meet 2A eligibility trades 10bp-15bp wider than 1B-eligible paper.

Meanwhile, an increase in the number of types of bonds being sold – in parallel with developments in mortgage products – and the spreading out of sales across the year has complicated auctions, with Realkredit Danmark, for example, taking the unprecedented step of cutting an individual auction in November after it was dissatisfied with the bids it received amid heavy supply.

Market participants said that action was necessary to address such issues, and Nykredit, Denmark’s biggest mortgage lender, has now announced plans to adjust its mortgage loan funding to simplify its bond offerings to produce fewer but larger bond series, with LCR considerations driving the initiative.

“It’s a reaction to the discussion of the LCR requirements, where you need to get above this magical Eu500m in order to get the Level 1 treatment,” Morten Bækmand Nielsen, head of investor relations at Nykredit Realkredit, told The CBR. “There was a lot of product development going on, especially in the early 2000s, and we had our two tier mortgaging system that also resulted in more ISIN codes coming out. Now we are kind of reversing that trend.

“We have a lot of big issues, but we also have a number of smaller ones, and we need to address that because there is such a big extra spread on bonds that will not reach this Eu500m level. It is simply bad for our customers to be funded in a bond below the Eu500m mark, and therefore we said, OK, let’s see what we can do in order to get rid of these smaller bond series and consolidate the issuance into bigger ones.”

After having led the move to hold quarterly rather than the historic annual auctions of bonds to refinance adjustable rate mortgages (ARMs), Nykredit will cut these back to twice a year, for 1 January and 1 July maturities. It will continue to hold sales of other products, such as floating rate notes, in the other two quarters.

The move to quarterly auctions had been driven by concerns from the Danish central bank and rating agencies about the previous concentration of funding, but according to Nielsen the benefits of the quarterly funding will not be lost, partly because it will still be holding four sets of sales and partly because the volume of short dated ARMs such as one and two years has fallen sharply – from some 26% of Nykredit’s loan portfolio at its peak to around 9%.

He said that the overall package will be implemented over the long term to ensure compliance with the Danish FSAs supervisory diamond for mortgage credit institutions.

One early move is to change the refinancing date for five year ARMs due for refinancing in October from 1 October 2021 to 1 July 2021, which Nykredit said will increase the size of the bond series maturing on the latter date. Other measure include a rejigging of business done out of different capital centres.

Other issuers are taking similar steps to Nykredit’s scheduling move. BRFkredit already offers most of its new ARMs with an April payment date and has said it is investigating the possibility of moving existing January and October loans to April to create bond series that fulfil Level 1B requirements.

Issuers are also continuing with initiatives designed to move borrowers away from shorter dated ARMs altogether, with Realkredit Danmark, for example, this week increasing fees on such products.

Analysts at Danske Bank expect the steps taken by Nykredit and the other institutions to have fewer ISIN codes to improve liquidity and to lead to a reduction in supply of Level 2B and non-LCR bonds.

“Given expectations regarding the forthcoming Net Stable Funding Ratio (2018), including the requirement for a certain share of long term funding for non-Level 1/1B asset purchases, we do not expect spreads between Level 1B and Level 2A/3 assets to narrow going forward,” they said.

However, another analyst said that moves towards addressing the issues were being taken only slowly and was sceptical about the extent to which a solution was being implemented.

“Nykredit has at least now acknowledged there is a problem,” he said. “But there is still a long way to go.”

Nykredit was the only Danish issuer to sell traditional ARMs bonds this week, issuing Dkr8bn of one years, Dkr2.1bn of three years and Dkr1.5bn of five years that are all Level 1B-eligible. The one and three year bonds were sold on Monday and Tuesday and achieved bid-to-covers ranging from 4.08 to 6.34 across the two days, while the five year was sold on Wednesday with a bid-to-cover of 2.77.

The majority of the week’s sales were of floating rate notes, from DLR Kredit, Nordea Kredit and Realkredit Danmark, selling Dkr5.85bn, Dkr28.6bn, Drk22.24bn, respectively.

Analysts said that spreads performed at the short end going into the week’s sales and that the FRNs were priced at a little tighter level than expected. Danske analysts said that the auctions had overall generated “solid” demand, with another analyst saying that demand was supported by high reinvestment needs.

Nykredit Realkredit on Tuesday held the last of Dkr26bn (Eu3.5bn) of one year sales in Danish kroner at a spread of Cita plus 17bp – wider than the 14bp level at its first auction on Tuesday of last week (18 November), but tighter than a wide of 21bp over.

The widest level hit last week was on Realkredit Danmark’s one years, which were on Wednesday of last week auctioned at 24bp over, 10bp wider than where they had been sold two days earlier. However, the recovery began on Thursday of last week, with RD’s spreads recovering to 22bp over, while bid-to-covers rose from lows of 1.5-1.6 times on RD and Nykredit auctions on the Tuesday, with the latter achieving 3.96 last Friday and 3.54 this Monday.

“After we had this correction in the pricing against swaps, increasing interest came in over the last few days,” said Lars Mossing Madsen, chief dealer at Nykredit. “We saw spreads tightening – not to the extent of before the auctions, but we recovered about half of the widening.

“In the last couple of years we have seen better and better auctions with tighter and tighter levels,” he added. “The takeaway from this is that it can go the other way.”

Nykredit raised a total of Dkr74.2bn equivalent from Monday of last week to this Wednesday in Danish kroner and euros across one, three and five year ARM bonds and other instruments.

DLR Kredit completed the bulk of its sales on Tuesday, having sold Dkr26.5bn of bonds – it will hold a further small sale next Wednesday of Dkr700m.

Pernille Lohmann, investor relations manager at DLR Kredit, said that the smaller issuer is typically happy if it achieves bid-to-covers of around 2 times, and it was able to achieve this on most of its sales in spite of the volatility, and its spread levels measured against the other issuers generally came out as expected.

“I understand that it got too expensive for investors and that we had to find a new level,” she said. “It is not a question of whether investors are there or not.”

Lohmann said that the auctions have become increasingly complicated for market participants given the increasing number and variety of auctions, with as many as 13 on one day.

Like other issuers, DLR Kredit has been working to get borrowers to take out different products to one year ARMs, and according to Lohmann 60% of the one year ARMs up for refinancing in the latest sales have been moved into other products, including three and five year ARMs, but also other products, meaning that its volumes were lower than previously.

Nordea Kredit and Realkredit Danmark (RD) kicked off the auction season yesterday (Monday), mainly selling one year bonds to refinance adjustable rate mortgages (ARMs). Nordea sold Dkr4bn (Eu537m) of the one year bonds yesterday with a bid-to-cover of 2.975, while Realkredit Danmark (RD) sold Dkr7.18bn of one year ARM bonds with a bid-to-cover of 2.11 times.

However, according to a covered bond analyst in Copenhagen, today’s bid-to-covers were lower and RD’s spread wider. He said that RD’s one year bonds had widened from around 14bp over Cita yesterday to 17.2bp over today, with the bid-to-cover down to around 1.6 and Nykredit Realkredit, which began its sales of one year ARM bonds today, achieving a similar level. Nordea’s bid-to-cover was down to 2.2 and its spread almost unchanged.

The analyst said that a lower than expected amount of bonds being auctioned – down from a forecast Dkr260bn to Dkr192bn, according to his figures – had led to expectations that prices would become very expensive and prompted yesterday’s aggressive levels, but then demand had been lower than expected, resulting in today’s widening.

“If you look at the current levels they are extremely aggressive, and that means that if you are, for instance, a hedge fund, they are difficult to buy because the repo compared to the yield is very limited, so you will get a low pick-up in buying these,” he said. “There has been some uncertainty whether they would be here or not – well we have seen that they are not buying the short dated bonds, so you have one investor segment where these bonds are no longer very attractive.”

However, he said that the 3bp widening was nothing dramatic – “a little bump” – and forecast that although spreads might yet widen further prices should look increasing interesting from an international perspective and attract foreign accounts. And he noted that there are still lots of investors who need to buy the Danish bonds while the amount available continues to fall.

Another analyst played down the developments, noting that the only change had been in RD’s spread, although he acknowledged that the bid-to-covers were low.

“Is that a sign that the rest will be at wider spreads and with low bid-to-covers?” he asked. “I’m not so sure. It is pretty common that we see spreads change a couple of basis points from day to day in the auctions.”

He also noted that DLR Kredit, which began its auctions today, had achieved the same spreads as RD, continuing the trend of the pricing of smaller Danish institutions converging with those of their larger peers.

Nordea Kredit is selling Dkr29.66bn and Eu900m in total, and its sales run until Friday, while RD is also auctioning throughout this week to raise Dkr58.6bn and Eu1.457bn.

Nykredit Realkredit began its sales yesterday with floaters and capped floaters, and having now starting its ARMs auctions is raising Dkr74.2bn with sales through to Wednesday of next week (26 November).

DLR Kredit is holding Dkr20.2bn and Eu840m of daily auctions until next Tuesday (25 November), and will then hold a single day of sales on 3 December for Dkr590m and Eu15m.

BRFkredit will begin its sales tomorrow (Wednesday) and continue through to Wednesday of next week, selling approximately Dkr44.5bn of bonds, including ARMs bonds and its RTL F bonds.

The Danish mortgage bank’s Sweden-targeted covered bond deal is being priced at 8bp over mid-swaps, the tight end of guidance of the 10bp over area. Leads Danske, Nordea and Nykredit Markets collected more than Skr20bn of orders for the Skr5.5bn April 2015 issue.

“It went extremely well,” said Lars Mossing Madsen, chief dealer at Nykredit Realkredit. “We were able to tighten the spread by 10bp since our last issue, but the bid-to-cover was more or less the same.”

Nykredit in September sold Skr10.3bn of one year SDOs at 18bp over on the back of a total order book of Skr56bn. It began syndicating its Swedish krona issuance in 2012 in a move designed to bring its sales closer to the model used by Swedish issuers in the domestic market.

The SDO was issued out of Nykredit’s Capital Centre H, backed by a cover pool including Swedish krona denominated mortgages. The transaction comes after Nykredit on Monday started the latest round of auctions held by Denmark’s mortgage banks for the refinancing of adjustable rate mortgage (ARM) bonds.

It has so far auctioned Dkr28.6bn (Eu3.83bn) of Danish krone denominated one year bonds, of which it intends to offer some Dkr72.098bn in total for the bulk of its issuance in the April refinancing auctions.

Bid-to-cover ratios started at 2.06 on Monday on the one year bonds and increased progressively since then to reach 3.25 today.

However, Geert Ditlev Kunde, chief analyst at Nykredit Markets, said that the auctions are so far somewhat softer than those held in November.

“Spreads are not as tight and yields are a bit higher,” he said. “Demand isn’t as strong as three months ago.”

Nykredit’s Madsen also said that demand is not as strong as in the end-of-year refinancing auctions and spreads are wider, although only 2bp-4bp wider compared with market levels preceding the auctions.

One year ARM bonds were auctioned at around 6.5bp over Cita in the November auctions versus around 14bp over in the latest round of auctions, he said, with some widening already evident in the issuer’s tap sales in between the auction periods.

Longer dated bonds have been tightening in recent weeks, however, noted Madsen. Nykredit will next week begin auctioning three year and five year ARM bonds.

Borrowers are still showing a preference for one year ARM bonds, he added.

“There hasn’t been a big shift from one years to longer dated bonds,” he said.

Realkredit Danmark (RD) will next Monday (24 February) join Nykredit in holding auctions, with Nordea Kredit starting its auctions the day after along with BRFkredit.

Nordea intends to auction Dkr13.5bn of Danish krone denominated one year ARM bonds across three days and smaller amounts of two, three, and four year bonds, plus Eu160m of euro-denominated one year ARM bonds. BRFkredit expects to sell Dkr4.2bn of one year bonds over two days.

DLR Kredit will hold auctions in March and is expecting to offer Dkr9.9bn of Danish krone denominated one year bonds, Dkr400m-plus of two to five year bonds, and Eu680m of one year euro denominated bonds.

RD will be the second biggest seller of bonds during the auctions after Nykredit. It plans to offer Dkr36.1bn of one year Danish krone denominated bonds, Dkr12.5bn of three year bonds and much smaller amounts of two and five year bonds.

Danske Bank analysts earlier this month noted that over the course of weekly updates on RD’s expected auction volumes a clear trend was emerging of more and more borrowers swapping ARM loans for alternatives.

Hella Gebhardt Rønnebæk, chief analyst at Realkredit Danmark, said that borrowers are continuing to shift from one year bonds to longer dated ARM bonds or into FlexKort, the new Cita-based loan RD launched in September, or Cibor-linked adjustable rate mortgages.

She said that 28% of borrowers shifted from one year bonds to longer term bonds.

The issuer has shortened its auction period by one week because the amount of bonds to be refinanced is lower than it initially expected, according to Rønnebæk.

DLR Kredit offered Dkr24bn of one year ARM bonds and Nykredit Dkr47bn, in addition to smaller amounts in longer maturities plus euro denominated supply.

BRFkredit, Nordea Kredit and Realkredit Danmark finish their refinancing sales tomorrow (Friday).

Pernille Lohmann, investor relations manager at DLR Kredit, said that the one year bonds were sold at competitive levels.

“The pricing was very good,” she told Nordic FIs & Covered. “The spreads versus our peers is very low and interest rates are at an all-time low, too.”

The yield on the DLR Danish krone one year ARMs was around 0.18% on average, she said, with the spread to Nykredit bonds on average 3bp across the one, three and five year bonds.

This latest refinancing round differed from previous auctions in that the bids tended to be more serious, according to Lohmann.

“Demand was not as high as for the other institutions if you look at the bid-to-cover, but the bids were very sharp,” she said. “Not many were out of the money so it seemed like the market knew where the bonds should be trading.”

Overall the auctions were “very satisfactory”, said Lohmann, with excess demand the main driving factor. That the bonds auctioned this November will not come under a Danish government plan for forced extension of ARMs probably also played a role, she added, echoing comments made by other market participants.

Nykredit’s auctions went “extremely well”, said Lars Mossing Madsen, chief dealer at the issuer.

“The levels tightened during the auction, including on the three and five years, and they are at the tightest levels since Lehman,” he said. “They were definitely a success for us.”

The spread versus Cita on the one year ARM bonds was around 6.5bp on average, compared with levels of 10bp-15bp before the auctions, according to Madsen.

He noted that although bid-to-cover ratios declined over the course of the auction, which is the usual pattern, Cita levels were stable to somewhat tighter.

“The quality of the bidding was really excellent,” he said.

DLR Kredit will also be auctioning a small amount of ARM bonds in December in relation to a residual number of mortgages where the borrowers did not approve a request for the refinancing month to be changed from December to November in the loan documentation.

“We received acceptance from more than 95% of borrowers, but a small number did not get back to us so we will be handling the residual auctions ourselves on Tuesday,” said Lohmann.

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.)