Denmark

Nykredit Realkredit opened the Danish auction season on Monday with the sale of Dkr800m of two year covered bonds and Dkr7bn of one year bonds that are structured with a maturity extension trigger. Despite the triggers, the one year portion was oversubscribed multiple times and priced a long way inside swaps which Nykredit was very satisfied with.

Danske Bank’s first covered bond of the year offered an attractive spread relative to its Nordic peers, which made it a relatively straightforward sell. But even so, the final level was just one third of Danske’s differential against Sweden a year ago.

Danske Bank has mandated joint leads for a euro seven year benchmark, which is expected to be priced on Tuesday. The Danish bank had been expected to make a deal announcement some time ago, but decided to hold back after some tightly priced core covered bond deals failed to garner a sizeable book.

Covered bonds rated AA- or higher will be elevated to a Level 1 asset in Liquidity Coverage Ratio (LCR) according to an internal document being circulated at the European Commission. This backs up a press release from the Danish government last Friday. The improved structural bid is most likely to affect bonds lower rated bonds previously ineligible for the LCR, said analysts.

A new draft recommendation from the European Commission (EC) that appeared on the Danish government’s website on Friday says covered bonds which meet certain criteria can be considered extremely liquid assets and can fulfil up to 70% of bank liquidity buffers with a 7% haircut.

The European Commission (EC) could be ready to lift the amount of covered bonds that can be used to fill Liquidity Coverage Ratio (LCR) requirements from a maximum of 40%, to a new higher limit of 60%, according to head of the Danish Mortgage Bankers Federation. The outcome could be known within a few days.

Credit sentiment is positive, and it seems unlikely that the European Central Bank would take anything other than an accommodative stance at next week’s policy meeting, but bankers are getting cautious that valuations are becoming overstretched, particularly in those markets which have until now been considered safe havens.

The new Danish covered bond law, which comes into effect on April 1, is a more complicated structure where a maturity extension is possible under limited circumstances. Because the new bonds carry a higher risk compared to the existing legacy bonds, issuers looking to sell bonds face increased execution risk. The Cover spoke to various buy and sell-side market participants to gauge their thoughts.

A Danish covered bond legal amendment, expected to come into force on April 1, is credit positive for Danish mortgage banks, Moody’s said on Monday.

Denmark’s efforts to improve its covered bond law and reduce refinancing risk for its banks is a step in the right direction, Standard & Poor’s said on Wednesday. However, refinancing risk will continue to be a problem.

The European Commission must ignore the counsel of the European Banking Authority, which has called for covered bonds to remain as level 2A assets within Basel III’s Liquidity Coverage Ratio. It must instead base its decision, due by June 30, on the EBA’s analysis that covered bonds are as liquid as sovereign bonds and good enough for Level 1 of the LCR.

Average spreads for Danish covered bond auctions, which finished on Wednesday, hit record lows, Danske Bank research said on Thursday. The auctions were heavily influenced by the government’s amended proposal to extend the maturity of bonds from next year.