Nykredit, Denmark’s largest mortgage lender, had issued euro FRN covered bonds before, but had never issued a euro covered bond via syndication, with past syndicated euro issuance having only been of junior covered bonds/senior secured and other instruments. Benchmark syndicated FRNs are meanwhile rare in the covered bond market.

“When you are a new issuer in a market and are also coming out with a product that is off the beaten path, like this floating rate format, you are of course a little nervous about how it will go,” Nicolaj Legind Jensen, head of funding at Nykredit, told The Covered Bond Report.

“Given that nobody has really issued floating rate benchmark euro covered bonds in the last two years, and everybody has been scared about what it would mean to print something with a negative effective yield, we were a little bit surprised that there was such an overwhelming interest in both the product and our name.”

Nykredit announced its plans regarding the debut issue (an SDO (særligt dækkede obligationer)) on 23 August, and, following a roadshow last week, launched the deal on Tuesday morning.

Leads JP Morgan, Natixis, Nordea, Nykredit and UniCredit opened books for the Eu500m (Dkr3.72bn) October 2022 FRN with guidance of the three month Euribor plus 10bp area. Guidance was later revised to the 8bp area on the back of over Eu1bn of orders, before the spread was fixed at 6bp with books in excess of Eu1.6bn, including Eu60m joint lead manager interest.

The deal was priced above par at 102.272 and with a coupon of three month Euribor plus 50bp. The coupon has a zero percent floor, to address the preferences of some investors.

Jensen said the deal had been priced at what Nykredit had seen as “the fair level”, being wider than outstanding issuance from compatriot Danske Bank and inside that of BRFkredit – a more recent entrant to the euro market.

“Danske Bank is an established issuer in the euro covered bond market and so it was natural that we price a few basis points above them,” he said. “The fact we didn’t have to give up anything in terms of pricing versus a standard format euro covered bond was also quite positive.”

Syndicate bankers at Nykredit’s leads estimated that a new five year euro fixed rate for Danske would be priced at around mid-swaps minus 9bp, which they said was equivalent to around three month Euribor plus 1bp, and a new five year for BRFkredit would be priced at around mid-swaps minus 1bp, equivalent to around three month Euribor plus 9bp.

The final book stood at Eu1.65bn, comprising more than 50 accounts. Banks bought 45% of the deal, fund managers 24%, pension funds and insurance companies 17%, central banks and official institutions 12%, and others 2%. Accounts in Germany and Austria were allocated 38%, the Nordics 26%, the Benelux 20%, France 8%, other Europe 6%, and others 2%.

“I think it is fair to say that when we started the roadshow, we feared the floating rate format would be a slight disadvantage for us, but it turned out to be almost the opposite,” said Morten Bækmand Nielsen, head of investor relations at Nykredit. “It was very well received, partly due to the fact that this was a format that caters very much to treasury accounts – many told us they are floating rate-based anyway, so it is fine for them.

“But what was more noteworthy was that there was a number of asset managers that also got involved, either because they have a natural floating rate interest or because they bought this as a protection against rises in interest rates going forward.”

Jensen added that many accounts new to Nykredit’s covered bonds had participated in the deal.

“Some of them we had seen before when we have issued senior and subordinated debt, but they have been unable to buy the Danish standard covered bond, which is normally amortising and in some cases also callables,” he said. “Some of those accounts came in in decent size in the FRN.

“We have also seen a lot of new accounts who, to the best of our knowledge, have not been active in our name before. The message from them is that they have always liked Nykredit, they just haven’t been able to buy us before.”

A banker at one of Nykredit’s leads said demand for the deal was also boosted by its timing – coming before an ECB meeting today (Thursday) – and its five year maturity.

“Besides the Nykredit name, the timing helped – as whether it is today, October, or the end of the year, everyone knows that Draghi will eventually say something that will make the market more volatile and move yields into a different arena,” he said.

“The tenor was also good, as fives are the sweet spot and it seems anything up to seven years works smoother.”

Like all Nykredit’s covered bond issuance, the new issue is match-funding mortgage loans. The issuer’s ability to offer further large euro FRNs will therefore depend upon growth in corresponding lending.

“Whether or not we will be able to source additional lending for this format will be interesting to watch in the coming quarters,” said Jensen. “Given the size of our euro-denominated assets, it could be something that will be interesting going forward.”

Nielsen added that many investors had asked Nykredit whether it will be a repeat issuer in the euro FRN format.

“I don’t think it’s a secret we would like to be,” he said. “But we are sticking to our guns and not putting derivatives in our cover pool, and hence we need the assets to be aligned.”

A banker at one of Nykredit’s leads said interest among other issuers in euro floating rate issuance has increased.

“You clearly have a more engaged conversation with issuer clients on this topic,” he said. “Issuers are interested and people do have this discussion, because if everything sits in floating in your asset pool, then swapping that into fixed to sell to an investor therefore costs you money.”

However, he said the range of potential issuers is limited by maturity preferences.

“If you are a super-frequent issuer used to issuing in the long end, I think it would be difficult to replicate such a success unless you go shorter than you usually would,” he added. “The floating rate market still only really goes out as far as five years – to go longer could be a challenge.”

The latest Danish adjustable rate mortgage (ARM) bond refinancing season – of which the FRN is a part – ended last Thursday, with issuers printing a total Dkr63bn of bullets – resulting in negative net supply of some Dkr26.5bn, which underpinned already tight spreads – and Dkr13.35bn of floaters. Nykredit was the most active issuer, offering Dkr37.5bn equivalent.

Analysts at Danske noted that average spread levels in non-callables across the curve were at their tightest for many years – with one year bullets having not been as tight since December 2006.

“The refinancing auctions generally attracted good interest from domestic and international investors,” they said. “Spreads generally remained low and were relatively stable during the auction period.”

Under the Capital Requirements Regulation (CRR), the use of qualifying senior tranches of mortgage-backed securities (MBS) in cover pools is generally restricted to 10% of outstanding covered bonds. However, in the past some issuers – notably CIF Euromortgage – started to use RMBS structures to transfer assets from group members to the central issuer, and a temporary waiver was introduced enabling supervisors to allow this (dubbed the “MBS waiver”).

After previously being extended – despite earlier negative comments from the European Central Bank and European Banking Authority – the waiver was due to expire at the end of this year unless prolonged by the Commission. In line with this, France updated its legislation to provide alternative means for issuers to transfer assets and bring an end to the use of French RMBS, and Axa and CIF Euromortgage modified their programmes accordingly.

But the European Commission on 11 August adopted a Delegated Regulation that would make the waiver “permanent”, citing its application to pooled covered bond structures, specifically that of Nykredit in Denmark. The Danish group has since 2006 – as approved by the Danish FSA (Finanstilsynet) – used a covered bond structure to transfer assets from one of its two mortgage credit institutions – Totalkredit – to its other – Nykredit Realkredit – with the latter used for market covered bond funding.

“The way we link those two mortgage banks together – the cover pools – and hence make sure we have this joint funding model where we only need to issue out of covered bonds out of one legal entity, is technically this MBS waiver,” Morten Bækmand Nielsen, head of investor relations at Nykredit, told The CBR. “The key difference between the other banks that have used it and us, is that we don’t technically have an MBS in our cover pool, but a covered bond that we effectively issue another covered bond on top of – which is the crucial difference also for the European Commission and the EBA.”

The Commission said that although there has been general support among Member States for allowing the waiver to expire with respect to MBS (which it noted are only permitted under the frameworks of France, Ireland, Italy and Luxembourg), there was support for extending it in relation to pooled covered bond structures as used by Nykredit.

The EBA previously recommended such a move, with the addition of a relevant clause carving out these covered bond structures to CRR Article 129, but the Commission said that due to time constraints the most sensible option is simply to remove the end-date of the waiver – but otherwise retain current language, such as “senior units issued by French Fonds Communs de Créances (FCCs) or by securitisation entities which are equivalent to FCCs” – thereby making it permanent.

However, market participants close to discussions around the waiver said that they expect it to ultimately be superseded by considerations in the anticipated EU covered bond Directive that would finally restrict the use of MBS in line with regulators’ wishes, as referred to in the latest Commission document: “Article 496(1) of Regulation (EU) No 575/2013 should therefore be amended to repeal the date mentioned in that provision, with the understanding however that the possibility for competent authorities to grant a waiver may have to be reassessed in the context of a future covered bonds framework.”

Commerzbank analysts described the solution as “an act of goodwill towards Denmark, in order not to undermine the business models of local issuers unduly”.

Nielsen at Nykredit said the move rather fits with the Commission’s overriding objective of not disrupting well-functioning business models.

The Delegated Regulation will be applicable from year-end unless objected to by the Council of the EU or the European Parliament.

The issuer yesterday announced it has mandated JP Morgan, Natixis, Nordea, Nykredit and UniCredit to arrange European investor meetings that will take place next week. The five year deal will be issued out of Capital Centre H, which comprises 77% residential mortgages (also including, for example, multi-family housing and cooperative housing associations) and 23% commercial.

Nykredit has issued euro FRN covered bonds before, but not via syndication, with past syndicated euro issuance having been of junior covered bonds/senior secured and other instruments.

It has previously moved to make its euro FRNs more attractive by targeting ultimate Eu500m (Dkr3.72bn), LCR Level 1B-eligible sizes for bonds that are initially sold in smaller amounts and then tapped, but these have also not been plain vanilla floaters.

“We have in the past issued very large Euro FRNs,” said Nielsen at Nykredit, “however, these have in a sense been a little bit odd, in that they were callable or amortising, for example, and some investors just couldn’t buy them because they didn’t fit in their risk management or they couldn’t hedge them. By doing a standard bullet FRN we can get past that problem, and that makes it possible for us to access investors that have not been able to buy these previously for technical reasons even if they like our covered bonds.”

Like all Nykredit’s covered bond issuance, the new issue (an SDO (særligt dækkede obligationer)) is match-funding mortgage loans and hence the issuer’s ability to offer a large euro FRN has been dependent upon growth in corresponding lending.

“We have explained to our customers that it may be beneficial to have a wider investor audience that is funding their loans, making the market more liquid and maybe even offering slightly better cost of funding,” said Nielsen. “So it is in everyone’s interest and they have decided to go with this.”

Unlike Nykredit’s Danish krone issuance, the coupon for the euro FRN will have a zero percent floor, as has been the case for its Swedish krona issuance. Nielsen said this is to address the preferences of some investors.

Benchmark syndicated FRNs are rare in the covered bond market, with one banker describing it as “a little bit no man’s land”. A notable exception as a Eu500m three year for UniCredit in January 2014 that was launched alongside a Eu1bn 10 year fixed rate deal. DNB Boligkreditt demonstrated demand for the format in 2014, albeit with a Eu50m private placement that was progressively tapped towards the Eu1bn mark.

The banker said that, based on these and other experience, the product is likely to appeal to bank treasuries. He noted that the instrument is expected to be LCR Level 1B-eligible, which requires a minimum Eu500m size.

The new issue is meanwhile part of Nykredit’s sales in the latest Danish ARMs refinancing season.

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.”

Nykredit Realkredit on 6 June sold its first SRN, a Eu500m three year issue, with the second, a Eu500m five year, following on Thursday of last week (7 July).

The “Tier 3” instrument was established to fulfil a similar purpose to the HoldCo debt of issuers in the UK and Switzerland and other new legislative solutions in the EU for liabilities that contribute to issuers’ MREL/TLAC-type requirements. However, Nykredit’s new issue differs from those two solutions, respectively, in being issued by the operating company of the group and based on not a legislative but a contractual structure.

“The senior resolution note is designed to do the same trick as the instruments you have in other countries,” according to Morten Bækmand Nielsen, head of investor relations at Nykredit.

Danish mortgage credit institutions – not being deposit-taking – are exempt from MREL, but have to hold a bail-in buffer of 2% of their mortgage assets under Danish regulations. For Nykredit Realkredit, this is equivalent to approximately Eu3bn, according to the issuer. The notes also fund overcollateralisation.

Moody’s – which rates Nykredit on an unsolicited basis – said yesterday that because the SRNs can be written down to absorb losses, ranking junior to unsubordinated debt if the entity were to enter resolution, and increase Nykredit Realkredit’s buffers in resolution, they are a credit positive for the issuer’s covered bond and senior unsecured investors.

Moody’s noted that with its two SRNs Nykredit now has covered about 32% of its debt buffer requirement, which will be phased in toward 2020.

On Friday of last week (8 July), Standard & Poor’s (S&P) revised from negative to stable the outlook on its ratings of Nykredit Realkredit and subsidiary Nykredit Bank, in part to reflect the contribution of the new SRNs to the issuer’s additional loss-absorption capacity (ALAC) buffers.

S&P cut the ratings from A+ to A, on negative outlook, in July 2015 when removing systemic uplift from its Danish bank ratings upon the implementation of BRRD, but a further notch of downgrade was avoided by measures including a commitment by Nykredit to build up an ALAC buffer of 5% of risk-weighted assets by mid-2017 – which it had already started doing before the SRNs, partially through Tier 2 issuance.

Upon raising the outlook last week, S&P said that Nykredit Realkredit has made “significant progress” in issuing capital instruments, also including Eu500m of Additional Tier 1 (AT1) issuance and Eu850m of Tier 2 last year, alongside the first SRN issuance.

“This issuance qualifies for ALAC, and we now expect the ALAC ratio for the bank to surpass our 5% threshold by 2017,” said the rating agency.

S&P said it expects Nykredit Realkredit to issue further Tier 2 or Tier 3 instruments to offset approximately DKK12bn (Eu1.61bn) of junior covered bonds as they mature, and improve ALAC as it prepares for an IPO in the next two years.

The rating agency added that the planned IPO, announced in February, could also support the current ratings.

“We continue to include a one-notch positive adjustment for ALAC support from Nykredit Realkredit’s a- stand-alone credit profile (SACP),” said S&P. “We note, however, that a successful IPO could improve our assessment of the bank’s capital and earnings, which would bolster Nykredit’s SACP.

“However, this would reduce the excess capital in Nykredit Realkredit’s ALAC buffers, likely prompting us to remove the additional notch for ALAC support.”

The SRNs are rated BBB+ by S&P, two notches below Nykredit Realkredit’s senior unsecured rating, but Fitch rates it at the same level as senior unsecured debt, A.

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 kicked off approximately Dkr123bn (Eu16.5bn) of auctions on Friday. The first day comprised just one year ARMs bonds, which were sold at a yield of minus 3bp and achieved a bid-to-cover ratio of 3.17. Nykredit then added three and five year paper yesterday (Monday), when Realkredit Danmark (RD) also entered the market.

“In general spreads have been widening a bit versus secondaries in the past couple of weeks due to what has been going on in the equity and credit markets,” said Lars Mossing Madsen, chief dealer at Nykredit.

Spreads on three year paper are some 4bp-5bp wider than ahead of the auctions, he said, with five years having widened a little less, while one year paper is some 6bp wider, at around 35bp over Cita today.

However, the wider spreads have attracted greater demand, according to Madsen, who noted that, for example, the bid-to-cover on Nykredit’s five year paper had increased from 2.22 yesterday to around 4.5 today (Tuesday).

An analyst said that moves in the five year segment were particularly notable, highlighting two trends playing into these. Firstly, a general weakening in longer dated Danish bonds over the past year – since the Danish central bank acted on speculation about the krone cap – which had also been evident in the government bond market, also partly reflecting the risk-off sentiment.

And secondly, news from Nykredit last Thursday – in conjunction with an announcement of its planned listing – that loan administration margins will be increased, most significantly for short dated mortgages.

“The administration margin increase is implemented in step with the objective of the Supervisory Diamond of the Danish Financial Supervisory Authority, which aims to ensure a limited use of interest-only loans, highly interest rate sensitive loans and loans with frequent refinancing,” Nykredit said.

The analyst said that this has been perceived as giving a further push to an existing trend of supply being increasingly weighted towards longer maturities.

Nordea Kredit and BRFkredit are beginning their sales today, and DLR Kredit tomorrow (Wednesday).

According to analysts at Danske, Denmark’s mortgage credit institutions are selling Dkr145.3bn and Eu3bn of bullet covered bonds to refinance adjustable rate mortgages (ARMs) from yesterday to Thursday of next week (26 November) plus a DLR Kredit sale on 2 December, with KommuneKredit, which has not given full details yet, expected to sell Dkr5bn and Eu700m as well. Nykredit Realkredit is also on Friday selling Dkr10.9bn of “RenteMax” FRNs.

Danske’s analysts said that the ARMs bonds performed some 5bp in the run-up to the auctions, with expectations of generally lower than expected supply a factor, highlighting significant remortgaging out of three, five and even longer ARM loans. Nykredit meanwhile noted that its Dkr21bn equivalent supply of one year ARMs is down almost Dkr90bn from the peak for the instrument in the corresponding 2009 auctions.

“The mortgage credit institutions have managed to move a lot of borrowers out of the one year to longer ARMs and other issues,” said Lars Mossing Madsen, chief dealer at Nykredit, “meaning the amounts of one year ARMs on these auctions are much, much smaller than we have seen in the past.”

Analysts had nevertheless noted that significant amounts of bonds will be sold by year-end after the auction season and that other potentially negative factors have been at play.

“We know that the lines the banks are giving to various accounts has been reduced over the years,” said Anders Aalund, chief analyst at Nordea Markets, for example. “Overall it was very difficult to predict the outcome.”

However, the first sales, yesterday, ultimately represented a positive outcome, according to Aalund and other market participants.

“Overall it’s going well,” said Nykredit’s Madsen. “Interest has been mainly much higher and the level is basically 2bp-4bp tighter than we were expecting before the auctions.

“Some of the auctions have been showing larger interest than on average in the past, with the three years especially well bid.”

At a Dkr1.2bn auction of three year ARMs yesterday Nykredit achieved a bid-to-cover ratio of 5.08, while its Dkr3.2bn of one years achieved 3.78. The one year paper was sold at a level of 22.2bp versus Cita yesterday and 24.5bp today (Tuesday), according to Madsen, and the three years minus 3bp and minus 4.5bp, respectively.

The levels and bid-to-covers achieved by Nykredit yesterday beat those of Realkredit Dannmark (RD), which sold Dkr6.5bn of one years with a bid-to-cover of 1.85, Dkr2.72bn of three years with 2.54, and Dkr1.41bn with 2.84, and a market participant said that the levels were a couple of basis points wider than Nykredit’s. He suggested that the relative levels of demand were due to LCR factors, with Danish banks not able to hold their own bonds for LCR purposes and RD parent Danske’s larger size versus Nykredit playing in the latter’s favour, although another market participant noted that RD was simply selling larger amounts than Nykredit on this occasion.

BRFkredit held its first sale this morning and market participants noted that its one years had come roughly flat to Nykredit and inside RD paper, in contrast to its typical levels.

“That was surprising because they are normally 3bp-5bp cheaper than Nykredit and RD,” said one “Today they were at the same level and that hadn’t been seen in secondary before.

“It is difficult to draw any conclusions from just one auction,” he added, “so it is not clear if it is a trend.”

However, another market participant said that the new pricing level was not unexpected following the merger of BRFkredit with Jyske Bank to make it “a fairly strong player”.

DLR Kredit begins its auctions on Thursday and Nordea Kredit on Monday.

Nykredit sold the bonds to refinance a capital centre that includes Swedish krona-denominated mortgages, while the issuer’s ongoing Danish krone auctions are to conclude on Friday.

The Swedish sale came amid wider volatility, with the European and US markets rebounding today after falling dramatically yesterday on the back of a Chinese market crash.

“These are not the easiest waters to navigate when you have all this volatility going on around you,” said Morten Bækmand Nielsen, head of investor relations at Nykredit. “While fixed income markets haven’t been that affected, it does still weigh a bit on sentiment.

“So overall this went well, and we are happy.”

The long one year FRNs pay a coupon of 65bp over three month Stibor and were priced at a discount margin of 26bp, with the final order books around 50% oversubscribed.

Leads Danske, Nordea and Nykredit went out with initial price thoughts of the mid-to-high 20s, before revising to guidance of 28bp plus or minus 2bp on the back of IOIs in excess of Skr12bn.

A syndicate official at one of the leads cited as a positive that they were able to price deal at the tight end of guidance.

“That is a testament to the fact this trade has worked,” he said.

The lead syndicate official noted that the curve of Swedish covered bond issuer Stadshypotek, though based on fixed rate issuance, suggested that a comparable issue would trade at around plus 4bp-5bp, implying Nykredit’s issue offered a pick-up over domestic paper of the low 20s.

The paper offered a concession to compensate for the smaller issue size and likely lower liquidity, according to Nielsen.

“Also, we are still the new kid on the block, even though we have been doing this a while,” he said.

Nielsen noted the sale was the first time that Nykredit had issued in Swedish krona with a 0% coupon floor, and suggested the addition had helped the paper find demand.

“The last time we issued in Swedish kronor we didn’t have an interest rate floor and that raised quite a lot of questions with investors,” he said. “That is why we decided to address that upfront and put a floor on this bond – simply to get that question out of the way.

“Also, because interest rates are negative in Sweden we would be met with that objection straight away, so we thought it was better to comply with local customs.”

The deal was distributed roughly evenly to accounts in Sweden, Denmark, and other jurisdictions, Nielsen added.

“It’s a market where we issue something that is relatively small compared to the outstanding amounts of benchmarks issued by Swedish issuers, but I think we have built up a very decent and consistent investor base in these Swedish krona covered bonds that we issue,” he said.

“There was a lot of the usual suspects in there, and we were happy to see that.”