Investment Research
10 May 2012
Danish Covered Bond Handbook
The covered bond handbook of mortgage banks in Denmark
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Investment Research — General Market Conditions
10 May 2012
Danish Covered Bond
Handbook 2012
In this document, we describe the Danish mortgage credit market and its pass-through
bonds, including a description of the security underlying the bonds. Until 2007 issuance
of Danish covered bonds (mortgage bonds) in Denmark was done through specialist
mortgage banks where the general feature was a pass-through product. However, the
significant revision of the law in 2007 opened the way for non-specialist banks to issue
covered bonds.
Covered bonds issued out of Denmark fall into two categories: traditional Danish
mortgage bonds (pass-through products) and euro-style covered bonds in a jumbo format.
Pass-through products tapped on a daily basis in the domestic market form the largest
residential covered bond market in Europe. Currently, only Danske Bank has established
an EMTN covered bond programme and issued euro-style covered bonds.
Chapter 1 briefly outlines the history of the Danish mortgage credit system. Chapter 2
explains the legal framework of the Danish mortgage credit system and the security
aspects of Danish covered bonds.
Chapter 3 describes the Danish mortgage banks and Chapter 4 provides an overview of
the current ratings of each institution and its rated capital centres. Chapter 5 gives a
detailed description of the characteristics of Danish covered bonds.
Moving along to prepayments, Chapter 6 describes how covered bonds can be refinanced
and shows different types of remortgaging strategies. Chapter 7 explains how to estimate
the prepayment rates for mortgage bonds.
Chapter 8 gives an overview of the investor distribution. Chapter 9 presents different
ways of measuring the yield pickup of Danish covered bonds and introduces the optionadjusted figures for yield spreads (OAS) and durations.
In Chapter 10 we describe the Danske Markets’ Danish Mortgage Bond Index. In Chapter
11, we describe the newly introduced bond futures on Danish covered bonds.
Finally, Chapter 12 summarises the available data on Danish covered bonds and Chapter
13 gives an overview of trading and issuing.
For a more information on the euro-style Danish covered bond, see the Danske Markets’
publication Scandi Covered Bond Handbook 2011/2012, September 2011.
Senior Analyst
Christina Falch
+45 45 12 71 52
[email protected]
Chief Analyst
Jens Peter Sørensen
+45 45 12 85 17
[email protected]
Senior Analyst
Jan Weber Østergaard
+45 45 13 07 89
[email protected]
Analyst
Søren Skov Hansen
+45 45 12 84 30
[email protected]
Important disclosures and certifications are contained from page 67 of this report.
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Contents
1. Historical background ......................................................................................................... 3
2. The mortgage credit system ........................................................................................ 6
3. Mortgage banks......................................................................................................................14
Realkredit Danmark....................................................................................................... 17
Nykredit/Totalkredit ...................................................................................................... 19
Nordea Kredit .................................................................................................................... 21
BRFkredit.............................................................................................................................. 23
DLR Kredit ........................................................................................................................... 25
4. Rating .................................................................................................................................................27
5. Bond types ....................................................................................................................................34
6. Prepayment ................................................................................................................................45
7. Estimating prepayments ..............................................................................................49
8. Portfolio composition .......................................................................................................52
9. Performance ..............................................................................................................................54
10. Danske Markets’ Bond Indices...........................................................................58
11. Futures on Danish covered bonds ..................................................................60
12. Available information ...................................................................................................62
13. Issuing and trading Danish covered bonds ...........................................63
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1. Historical background
In 1795 a huge fire in Copenhagen burned one in four houses in the city to the ground.
Funding was needed to rebuild the city but provision of credit was scarce. Lenders
formed a mortgage association to provide loans secured by mortgages on real property on
the basis of joint and several liability to enhance credit quality.
To fund the loans, the first Danish mortgage bonds were issued and thus a more than 200year tradition of mortgage bond issuance in Denmark commenced.
Market profile
Over the past 200-plus years, the Danish mortgage credit system has gone through a
number of stages and survived several occasions of economic and political turmoil,
including the bankruptcy of the Kingdom of Denmark in the early-19th century and the
depression of the 1930s, with no record of a default.
No record of mortgage bond default
This unblemished track record is attributable mainly to the strong legislative framework,
which, from an early stage in the development of the market, has put great emphasis on
the protection of the mortgage bond investor by imposing strict limits on the risk taking
of the mortgage banks. In 1850, a long tradition of strict regulation of the activities of
mortgage banks commenced with the passing of the first Mortgage Bond Act. The legal
framework has been amended several times. However, guiding principles such as the
balance and investor protection principles have remained unchallenged (Chapter 2
describes the present Mortgage Credit Act in detail).
First mortgage bond act in 1850
During its first 100 years, the Danish mortgage credit sector consisted of many mortgage
credit associations, where mutuality was in focus. Mutuality, however, contributed to a
very restricted lending policy, as the most important duty of a mortgage credit association
was to safeguard the interests of its members.
Legislation amended several times but
basic elements remain the same
At the end of the 1950s, the Danish government took the initiative to establish
independent mortgage banks. Commitment to mutuality gradually disappeared and
institutions with independent means were established. This resulted in a more liberal
lending policy.
Deregulation in 1989 prompted fierce
competition, which led to consolidation
in the sector
Since 1970, several reforms have been made in the mortgage credit legislation of
Denmark. In search of economies of scale, the mortgage credit reform in 1970 introduced
a provision that future new mortgage banks were only to be approved if there was an
apparent need. The number of mortgage banks was subsequently reduced from 24 to
seven. Another important change in 1970 was the switch from a three-tier to a two-tier
system – ordinary and special mortgage credit loans. This subsequently led to the 1980
reform, which introduced the use of only one tier known as the ‘unity’ mortgage credit
system – a system that is still in place.
In 1989 deregulation resulting from EU directives enabled commercial and savings banks
to establish mortgage banks – formed as limited companies. Traditional mortgage banks
were allowed to convert into limited companies as well. New lenders entered the market
and fierce competition ensued, resulting in consolidation within the sector.
Since 2000 the merger of Danske Kredit, BG Kredit and Realkredit Danmark and that of
Nykredit and Totalkredit have intensified competition even further to form the market as
we know it today.
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Danish covered bonds (mortgage bonds) are issued by a comparatively small number of
mortgage banks (MCIs) – at present seven – adding to the liquidity of the bonds issued.
Furthermore, market concentration is high, with Nykredit/Totalkredit and Realkredit
Danmark accounting for 74.2% of all Danish krone covered bonds issued and 73.0% of
all Danish euro covered bonds issues (see table below).
Table 1. Volumes and market shares of Danish MCIs, end of 2011
Volume
Market Volume
Market
Total volume
Market
(EURbn)
share (%) (EURbn)
share (%)
(EURbn)
share (%)
Nykredit/Totalkredit
131.7
44.4%
16.1
52.0%
147.9
45.1%
Realkredit Danmark
88.2
29.7%
6.5
21.0%
94.7
28.9%
Nordea Kredit
36.0
12.1%
1.4
4.4%
37.4
11.4%
BRFkredit
26.4
8.9%
0.2
0.7%
26.7
8.1%
DLR Kredit
12.3
4.1%
6.8
21.9%
19.1
5.8%
1.8
0.6%
0.0
0.0%
1.8
0.6%
0.03
0.01%
0.00
0.00%
0.03
0.01%
296.5
100.0%
31.0
100.0%
327.7
100.0%
LRF
FIH Realkredit
Total
Source: Danske Markets
The current mortgage credit market
On 1 July 2007 an amendment to the legal framework came into force offering universal
banks access to covered bond funding alongside the established specialist mortgage
banks.
New Mortgage Act in July 2007
So far, only one universal bank has issued covered bonds. In mid-December 2007 Danske
Bank issued the first covered bond in the form of a DKK10bn Danish-krone-denominated
covered bond with a floating rate. The first euro-denominated benchmark bond was
issued in mid-April 2008. Since December 2007, Danske Bank has issued a total of
EUR15bn covered bonds, including six euro-denominated benchmark covered bonds.
House prices in Denmark experienced a gradual increase over the decades leading up to
the beginning of the financial crisis in 2007. During the financial crisis house prices fell
quite significantly until the beginning of 2009, when we saw a stabilisation in house
prices (see the chart below).
Historical development in house prices
Between the peak in 2007 and Q4 11 house prices in Denmark declined by 19%. In
France, Germany, Norway we have seen house prices rebound, rising by 3.2%, 7.6% and
19.5% respectively since year-end 2007. In Spain and the UK house prices have declined
by 18% and 10%, respectively, over this period.
Chart 1. House prices in selected countries 1998-11 (index 100= ’98)
Germany
290
Denmark
Spain
France
UK
Norway
240
190
140
90
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
Source: Reuters EcoWin
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Despite, the significant fall in house prices during the financial crisis, the level of
repossessed dwellings and loans in arrears has been very low. This is due to the low
unemployment rates in Denmark and the strong mortgage legislation.
Low level of repossessed dwellings/
loans in arrears in Denmark
Chart 2. Repossessed dwellings and loans of arrears
3.0%
2.5%
5000
Loan in arrears
Reposessed dwellings (rhs.)
2.0%
4000
3000
1.5%
1.0%
2000
0.5%
1000
0.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
0
Source: Association of Danish Mortgage Bonds
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2. The mortgage credit system
Danish mortgage banks provide mortgage lending at a very competitive cost. This has led
to a persistent demand for mortgage lending from owners of real property in Denmark
and makes the Danish mortgage market the largest in the world compared with GDP and
the second largest in Europe in absolute terms – exceeded only by the German Pfandbrief
market.
Until 1 July 2007 the Danish mortgage market was characterised by two main features.

Only specialist mortgage banks (MCIs) were allowed to issue Realkreditobligationer
(covered bonds).

All MCIs followed a strict balance principle, where the loan to the household was
matched exactly by the bond bought by the investor. A pure pass-through system as
shown below, where the MCI did not take interest rate, volatility, FX or liquidity
risks.
Chart 3. Pass-through system
Household
Loan
Mortgage
MortgageBank
Bank
Bond
Investor
Source: Danske Markets
On 1 July 2007 an amendment to the legal framework came into force. The purpose of the
amendment was twofold.

To render the Danish covered bond system compliant with the covered bond criteria
in the EU Capital Requirement Directive (CRD).

To give Danish universal banks access to covered bond funding of eligible assets.
To meet its purpose the amendment introduced different bond types, three of which could
be called covered bonds as they fulfilled UCITS and CRD.

SDO – særligt dækkede obligationer.

SDRO – særligt dækkede realkreditobligationer.

Realkreditobligationer issued before 31 December 2007.
SDO, SDRO and Realkreditobligationer issued before 31 December 2007 are all
classified as covered bonds and are CRD compliant and thus carry low risk weights. The
single difference between the SDOs and SDROs is that SDROs may be issued by
specialist mortgage banks only, whereas covered bonds may be issued by both universal
banks and specialist mortgage banks.
Finally, the amendments allowed the MCIs to issue Realkreditobligationer but
Realkreditobligationer issued after 31 December 2007 are not CRD compliant and high
risk weights apply. Furthermore, the amendments gave the MCIs as well as the universal
banks the possibility to issue under two different balance principles.

The specific balance principle, which is very close to the old balance principle.

The general balance principle, which is more in line with what we see in euroland.
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Below we illustrate how issuers in the Danish market have positioned themselves with
regard to the type of covered bond and the type of balance principle. A more thorough
description of the two balance principles is found at the end of this chapter.
The two specialised mortgage banks Nordea Kredit and Realkredit Danmark, which are
owned by the two large banks Nordea and Danske Bank, respectively, are the only ones
that issue covered bonds in the SDRO format and adhere to the specific balance principle.
The specialist agricultural mortgage bank DLR Kredit also adheres to the specific balance
principle. The message from these issuers is therefore clear: they are sticking to their
traditional pass-through mortgage business.
Table 2. Danish issuer positions
Issuer
Type
Balance principle
Issuing principle
BRFkredit
SDO
General principle
Pass through
Danske Bank
SDO
General principle
Euro style
DLR Kredit
SDO
Specific principle
Pass through
Nordea Kredit
SDRO
Specific principle
Pass through
Nykredit/Totalkredit
SDO
General principle
Pass through
Realkredit Danmark
SDRO
Specific principle
Pass through
Source: Danske Markets
BRFkredit and Nykredit/Totalkredit have opted for the general balance principle and
issue covered bonds in the SDO format – as does DLR Kredit. The primary reasons for
doing this are to have the option to carry out joint funding, to benefit from the slightly
more flexible balance principle and to have the option to include a broader range of
collateral in the cover pool.
Not being a specialised mortgage bank, Danske Bank is allowed to issue only covered
bonds in the form of SDOs and, being a universal bank, the general balance principle
within the ALM suits it best. So far, as we see it, Danske Bank is the only bank issuing
covered bonds in Euroland through syndicated deals in EUR. The traditional Danish
mortgage banks still rely on daily tap issuance as well as two to three refinancing auctions
per year.
Legislation
Danish mortgage banking is supported by restrictive and detailed regulations designed to
protect covered bond investors. Mortgage banking in Denmark is regulated subject to the
general Financial Business Act, the specific Mortgage-Credit Loans and Mortgage-Credit
Bonds Act and a number of Ministerial Orders.
Key elements of the regulation are as follows.

Specialist mortgage banks must operate subject to the balance principle limiting the
market risk exposure of the issuer to a minimum.

Bonds issued and collateral must be assigned to specific capital centres within the
specialist mortgage banks.

Each capital centre is regulated subject to a balance principle – either the general or
the specific principle – at the decision of the issuer.

Mortgage loans and securities serving as collateral must meet restrictive eligibility
criteria, including loan-to-value (LTV) limits and valuation of property requirements.
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
Investors have a privileged position in the case of bankruptcy, rendering covered bond
bankruptcy remote.

The mandatory over-collateralisation of the cover pool is subject to the selection of
either the general or the specific balance principle.

Mortgage banks are closely supervised by the Danish FSA.

Mortgage collateral will observe LTV limits at single loan levels at all times.
A key feature of the Danish system is very well-defined property right through a general
register of all properties in Denmark. This is called the Danish title number and land
registration systems and efficient compulsory sale procedures. The title and land
registration systems ensure that ownership and encumbrances on individual properties are
easily identified and that the information is available to the public. Furthermore, in case a
borrower defaults on a payment, the mortgage bank can take over the house and the
compulsory sale procedure would ensure that a mortgage bank can sell the house in the
real estate market or through a forced sale. The period from default to a forced sale being
completed may be as short as six months. Hence, the Danish title number and land
registration systems add investor protection.
Property registration and the
compulsory sale system
Balance principle
The balance principle is a guiding principle of Danish mortgage banking, which restrictively
regulates the market risk exposure of the mortgage banks. The principle imposes a number
of tests, which must be passed at all times and the mortgage bank must choose to adhere to
one of two balance principles: the general balance principle or the specific balance principle.
Table 3. Balance principles
General principle
Specific principle
Payments definition
Payment may include margins
Payments excl. margins
Interest risk
Risk limit 1%1 +2%2 of OC: +/-100bp parallel shift
Risk limit 1% of OC: +/-100bp parallel shift and twist
Risk limit 5%1+10%2 of OC: +/-100bp twist and +/-250bp shift
Exchange rate risk
50% offset of EUR interest rate risk
No offset of EUR interest rate risk
Risk limit 10% of OC:
Risk limit 0.1% of OC
+/-10% shift in EU currencies
Currency indicator II
+/-50% shift in other currencies
Option risk
Risk limit 0.5%1+1%2 of OC:
Perfect hedge required
+/-100bp shift in volatility (vega)
Liquidity risk
Deficits in interest payments may not exceed OC within 12M
Deficits in total payments limited to:
NPV surplus of all future payments
25% of OC in Y0-3
50% of OC in Y4-10
100% of OC in Y10 onwards
1. % of the capital adequacy requirement
2. % of the additional excess cover for mortgage banks
Note: OC = overcollateralisation
Source: Danske Markets
The balance principle is enforced by the Danish FSA. If a mortgage bank does not pass
the tests, the FSA must be informed immediately. In addition, mortgage banks must
report their market risk exposure to the FSA on a quarterly basis.
Interest rate risk is tested in scenarios of both yield curve shifts and yield curve twists.
The diversity of scenarios implies that duration matching of a loan and funding portfolio
will not be sufficient to pass the test.
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Interest rate risk test
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Chart 4. Shifting the yield curve
Current curve
Parallel shifts
Twisted shifts
Source: Danske Markets
Currency risk is tested in scenarios of shifts in the currencies in which the bonds have
been issued to comply with the general principle.
Currency rate test
Currency risk is tested employing an empirical measure of the greatest loss suffered
within a 10-day period with a 0.99 probability (Currency Indicator II) to comply with the
specific principle. The measure is calculated by the Danish FSA.
Option risk is tested in scenarios of shifts in the volatility (vega) to comply with the
general principle.
Option risk
Employing the pass-through principle to comply with the general principle, the issuer
remains unaffected by borrowers calling the loan at par.
The cover of future payments to covered bond investors is tested to limit the liquidity and
funding risk of mortgage banks. In passing this test, mortgage banks will have sufficient
liquidity to meet future payments on mortgages.
Liquidity risk
Specialist bank principle
The specialist bank principle confines the activities of mortgage banks to mortgage
lending based on the issuance of covered bonds.
The principle implies that mortgage banks are prohibited from granting loans that do not
meet the eligibility criteria imposed by legislation. Similarly, the sources of funding are
confined to issuing covered bonds, i.e. collecting deposits is not an applicable source of
funding for Danish mortgage banks.
The principle implies that mortgage banks operate as monoline businesses, which adds to
the transparency of investing in covered bonds.
Asset eligibility criteria
Mortgage loans and securities serving as collateral must meet restrictive eligibility criteria
including LTV limits and valuation of property requirements laid down in the legislation.
Mortgage loans eligibility criteria
Eligibility criteria for mortgage loans are subject to the type of bond issued.
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Table 4. Eligibility criteria for mortgage loans
RO
SDO/SDRO
Collateral assets
Real property
Real property, public loans,
LTV calculations
At time of granting the loan
derivatives and substitutions assets
Frequency to comply with FSA
recommendations
Source: Danske Markets
Table 5. Eligibility criteria for mortgage loans – maximum LTV
Property type
RO
SDO/SDRO
Private residential property
80%
80%
Residential rental property
80%
80%
Office and shop property
60%
70% (with a guarantee)
Industrial property
60%
70% (with a guarantee)
Agricultural property
70%
70% (with a guarantee)
80-100%
80%
75%
75%
Loans covered by municipal guarantee
Source: Danske Markets
Ships are not eligible for SDROs under the specific Mortgage-Credit Loans and
Mortgage-Credit Bonds Act. Ships are funded by Danish Ship Finance under the Act on a
ship finance institute.
Eligibility criteria for realkreditobligationer (RO) are as follows.

Terms may not exceed 35 years for mortgage loans guaranteed by municipalities and
30 years for all other mortgage loans.

Private residential and leisure home mortgages may not be repaid more slowly than a
30-year annuity with an option for interest-only periods of a maximum of 10 years.
Eligibility criteria for all bond types are as follows.

Market value of pledged property must be assessed by the mortgage bank.
In general, the pledged property must be valued subject to an inspection of the property by a
valuation officer of the mortgage banks. However, the majority of the Danish mortgage
banks, for example Realkredit Danmark, Nykredit/Totalkredit, BRFkredit and Nordea kredit,
have developed a valuation model based on extensive data on property prices in Denmark.
The Danish FSA has reviewed the reliability of the models. Based on this, the FSA has
granted an exemption from the inspection requirement for properties meeting certain criteria.
Securities may only serve as collateral temporarily. Proceeds from issuing covered bonds
must be invested in mortgage loans within 90 days of the issue. Similarly, proceeds from
borrower payments exceeding payments to covered bond investors must be invested in
mortgage loans or be used to redeem circulating covered bonds within 12 months. Hence,
covered bonds are primarily collateralised by mortgages on real property.
Securities eligibility criteria
Eligible securities are as follows.

Government bonds and deposits with central banks issued by OECD member states.

Covered bonds issued by mortgage banks in OECD member states.

Deposits in commercial banks with a maximum term of 12 months.
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Bankruptcy regulation
Covered bond investors are awarded a privileged position in a bankruptcy scenario. The
privileged position ensures that covered bond investors will only in exceptional cases be
affected in a bankruptcy scenario, rendering the chances of covered bond bankruptcy remote.
Chances of bankruptcy remote
The bankruptcy regulation specifies detailed guidelines, which must be observed in a
bankruptcy scenario. Key points of the guidelines are as follows.

A trustee will be appointed by the Danish FSA to manage all financial transactions of
the mortgage bank.

The trustee will be instructed to meet all payment obligations on covered bonds issued
in due time notwithstanding a suspension of payments of the mortgage bank.

All new lending activities of the mortgage bank will be ceased.

The trustee has the option of issuing refinancing bonds for the refinancing maturing
covered bond debt. Refinancing debt will be comprised by the bankruptcy privilege on
equal terms with covered bond debt. The trustee has the further option of issuing
unsecured debt.

Payments on loans will not be accelerated. Hence, payments from borrowers will fall
due according to the original payment scheme.

The trustee may not pay other creditors before all payment obligations on issued
covered bonds have been met in full.

The guidelines have been thoroughly investigated by Moody's and Standard & Poor's.
They have concluded that the guidelines provide for a sufficient protection of covered
bond investors in a bankruptcy scenario and therefore the chances of a Danish
covered bond bankruptcy are remote.
Mandatory over-collateralisation
Mortgage banks must observe capital requirements as defined in applicable EU
Directives, i.e. the capital base of mortgage banks must be a minimum of 8% of riskweighted assets.
The mandatory over-collateralisation of mortgage banks falls within the scope of the
privileged position of covered bond investors in a bankruptcy scenario. The trustee will
be instructed to employ the mandatory over-collateralisation exclusively to meet the
payment obligations on covered bonds issued. The mandatory over-collateralisation may
not be employed for any other purpose.
Under Danish mortgage credit legislation, excess funds from an issue of mortgage bonds
may be placed in low-risk and marketable securities according to paragraph 152c in the
Danish Mortgage Act (see below).
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Paragraph 152c of the Danish Mortgage Act
152c. (1) The following types of assets may be included as collateral for the issue of covered
bonds:
1. Loans secured by registered mortgages on real estate, see section 152d.
2. Loans secured by liens on ships registered in the Danish Ship Register, the Danish
International Ship Register or any other internationally recognised ship register offering
equivalent security, see section 152f, and loans for the purpose of funding the building or
renovation of ships granted without liens on ships.
3. Bonds or instruments of debt issued by or guaranteed by central governments, central
banks, public entities, regional or local authorities in a country within the European Union or in
a country with which the Community has entered into an agreement for the financial area.
4. Bonds or instruments of debt issued by or guaranteed by central governments, central
banks, public entities, regional or local authorities in a country outside the European Union with
which the Community has not entered into an agreement for the financial area, multilateral
development banks or international organisations, if a calculation of the risk-weighted items
weights the non-subordinated and unsecured debt of the issuers concerned by 0%, see Annex
VI of the Directive relating to the taking up and pursuit of the business of credit institution.
5. Bonds or instruments of debt issued by entities referred to in nos. 3 and 4 hereof and where
a calculation of the risk-weighted items weights the issuer’s non-subordinated and unsecured
debt at 20%, see Annex VI of the Directive relating to the taking up and pursuit of the business
of credit institutions. It is a condition that the value by which these assets are included does
not exceed 20% of the nominal value of the issuer’s outstanding covered bonds.
6. Bonds or instruments of debt issued by credit institutions, if a calculation of the riskweighted items weights the non-subordinated and unsecured debt of the relevant credit
institutions at 20%, see Annex VI of the Directive relating to the taking up and pursuit of the
business of credit institutions. Bonds or instruments of debt issued by a credit institution in a
country within the European Union or in a country with which the Community has entered into
an agreement for the financial area that have an original term of 100 days or less may be
included if a calculation of the risk-weighted items weights the non-subordinated and
unsecured debt of the relevant credit institution at not more than 50%, see Annex VI of the
Directive relating to the taking up and pursuit of the business of credit institutions. The value
by which the assets referred to in the first and second sentences hereof are included may not
exceed 15% of the nominal value of the issuer’s outstanding covered bonds. This condition
does not apply to receivables arising from instalment and interest payments on or repayments
of loans secured by mortgages on real estate.
7. Other non-subordinated receivables from credit institutions as referred to in no. 6 hereof. It
is a condition that the value at which these receivables from the said credit institutions are
included does not exceed 15% of the nominal value of the issuer’s outstanding covered bonds.
This condition does not apply to receivables arising from payments of instalment and interest
on or repayments of loans secured by mortgages on real estate.
Source: The Danish FSA.
FSA supervision
The risk profile of mortgage banks is closely monitored by the Danish FSA.
Property valuations are reported directly to the FSA for control purposes. If the value of a
pledged property is set too high, the FSA will carry out a second valuation. If the second
valuation confirms that the value is set too high, the FSA will instruct the mortgage bank
to reduce the size of the loan to observe the maximum LTV ratio.
Property valuations are reported to the
FSA
Reports to the FSA are prepared on a quarterly basis on the following.

Credit risk exposures.

Market risk exposures.

Solvency.
Inspections of mortgage banks by the FSA are performed on a regular basis. During
inspections the FSA will monitor if risk mitigating procedures are sufficient and adhered
to.
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Central bank eligibility
Danish covered bonds in euro and Danish kroner are repo eligible in Danmarks
Nationalbank and some are also repo eligible at Sveriges Riksbank, Norges Bank and the
Swiss central bank.
Realkredit Danmark, Nykredit, Nordea Kredit, BRF and DLR have issued EURdenominated covered bonds – non-callables and floaters – through a Luxembourg-based
central securities depositary (VP Luxembourg). These bonds have LU isin codes and
some are ECB eligible. The bonds are listed for quotation on OMX The Nordic
Exchange. The issuance of bonds via VP Luxembourg does not limit investor capability
to use Værdipapircentralen A/S for custody services.
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Danish covered bonds issued out of
Luxembourg repo eligible in ECB
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3. Mortgage banks
In this chapter we focus exclusively on mortgage banks. The specialist bank principle
confines the activity of mortgage banks to mortgage lending funded by the issuance of
covered bonds (mortgage bonds). Activities not directly linked to mortgage lending and
mortgage bond funding are prohibited.
The specialist bank principle
In return, mortgage banks are awarded the privilege of issuing covered bonds. Entities
that are not licensed as mortgage banks do not have access to covered bond funding.
Mortgage banks are thus specialised monolines completely focused on property finance.
Mortgage banking market
Persistent demand for housing finance in Denmark has made the Danish covered bond
market one of the largest in the world. On covered bonds, Denmark is the second-largest
country, beaten only by Spain. Overall, taking into account covered bonds with public
loans as collateral, Denmark ranks third.
Market penetration is high
Table 6. Volume outstanding covered bonds end-2010 (EURm)
Public sector
Mortgage
Ships
Mixed assets
Total
Austria
19,555
7,645
0
0
27,200
Canada
0
18,003
0
0
18,003
Czech Republic
0
8,242
0
0
8,242
Denmark
0
332,505
6,722
0
339,227
Finland
0
10,125
0
0
10,125
France
75,548
156,239
0
88,693
320,480
Germany
412,090
219,947
7,805
0
639,842
Greece
0
19,750
0
0
19,750
Hungary
0
6,323
0
0
6,323
Ireland
36,550
29,037
0
0
65,587
Italy
10,092
26,925
0
0
37,017
0
63
0
0
63
28,889
0
0
0
28,889
Latvia
Luxembourg
Netherlands
Norway
Poland
Portugal
Slovakia
0
40,764
0
0
40,764
1,837
70,178
0
0
72,015
126
511
0
0
637
1,400
27,730
0
0
29,130
0
3,442
0
0
3,442
18,350
343,401
0
0
361,751
Sweden
0
188,750
0
0
188,750
Switzerland
0
62,046
0
0
62,046
3,548
205,370
0
0
208,918
Spain
United Kingdom
United States
0
11,497
0
0
11,497
EU-27
606,148
1,626,768
14,527
88,693
2,336,136
Total
607,984
1,789,739
14,527
88,693
2,500,943
24%
72%
1%
4%
100%
%
Source: ECBC European Covered Bond Fact Book 2011
In percentage of GDP, the Danish covered bond market is by far the largest covered bond
market in Europe.
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Table 7. Overview of residential mortgage markets 2010
Total covered bonds outstanding
Residential mortgage
Residential mortgage debt
(backed by mortgages)
Covered bonds as % GDP
debt to GDP ratio (%)
per capita (EUR000)
Austria
9,647
3.4
28
9.55
Belgium
n.a.
n.a.
46.3
15.07
Bulgaria
n.a.
n.a.
12.4
0.59
Cyprus
n.a.
n.a.
68.9
14.98
Czech Republic
Denmark
8,242
5.7
12.8
1.77
332,505
141.8
101.4
42.88
Estonia
n.a.
n.a.
41.7
4.46
Finland
10,125
5.6
42.3
14.25
France
200,585
10.4
41.2
12.31
Germany
219,947
8.8
46.5
14.09
19,750
8.6
35
7.12
6,191
6.3
25.2
2.48
Ireland
29,037
18.9
87.1
30.4
Italy
26,925
1.7
22.7
5.83
Latvia
63
0.3
36.2
2.89
Lithuania
n.a.
n.a.
21.8
1.8
Luxembourg
n.a.
n.a.
44.7
37.03
Greece
Hungary
Malta
Netherlands
Poland
Portugal
n.a.
n.a.
43.5
6.5
40,764
6.9
107.1
38.01
511
0.1
19.1
1.77
27,730
16.1
66.3
10.77
0.32
Romania
n.a.
n.a.
5.6
Slovakia
3,442
5.2
16.5
2
Slovenia
n.a.
n.a.
13.7
2.36
Spain
341,321
32.3
64
14.79
Sweden
188,750
54.5
81.8
30.37
UK
205,370
12.1
85
23.27
52.4
12.88
EU27
1,672,984
Iceland
n.a.
n.a.
n.a.
n.a.
Norway
69,871
22.3
70.3
45.16
Russia
n.a.
n.a.
2.7
0.21
Turkey
n.a.
n.a.
5.5
0.42
Ukraine
n.a.
n.a.
8.5
0.19
11,497
0.1
76.5
27.04
USA
Source: European Mortgage Federation
Covered bonds in circulation by issuer
Danish covered bonds are issued by a total of seven mortgage banks, of which three
specialise in commercial lending. The fairly low number of issuers adds to the liquidity of
the bonds issued.
In addition, market concentration is high, with Nykredit/Totalkredit and Realkredit
Danmark accounting for more than 74% of all covered bonds issued.
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Table 8. Volumes and market shares of Danish MCIs end-2011
Volume
Market Volume
Market
Total volume
Market
(EURbn)
share (%) (EURbn)
share (%)
(EURbn)
share (%)
Nykredit/Totalkredit
131.7
44.4%
16.1
52.0%
147.9
45.1%
Realkredit Danmark
88.2
29.7%
6.5
21.0%
94.7
28.9%
Nordea Kredit
36.0
12.1%
1.4
4.4%
37.4
11.4%
BRFkredit
26.4
8.9%
0.2
0.7%
26.7
8.1%
DLR Kredit
12.3
4.1%
6.8
21.9%
19.1
5.8%
1.8
0.6%
0.0
0.0%
1.8
0.6%
0.03
0.01%
0.00
0.00%
0.03
0.01%
296.5
100.0%
31.0
100.0%
327.7
100.0%
LRF
FIH Realkredit
Total
Source: Danske Markets
Portfolio segmentation
Mortgages on a variety of categories of real property are eligible as collateral for
mortgage bonds. However, mortgages on residential property dominate most collateral
pools.
Residential property mortgages
dominate collateral pools
In the past decade, the domination of mortgages on residential property has been further
strengthened. New lending products, house price inflation and remortgaging opportunities
have spurred demand from homeowners and in 2011 loans secured by mortgages on
residential property accounted for 58% of total net new lending.
Chart 5. Lending segments 2006 and 2011 in loan portfolio, by property category
Owner-occ. housing
End 2001
Subsidised housing
6%
Aggricultural property
3% 2%
7%
2%
10%
58%
2%
58%
10%
Office/non-resident
Private rental
End 2011
11%
11%
Manufact. industries
13%
Other
7%
Source: The Association of Danish Mortgage Banks
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Realkredit Danmark
Company profile
Realkredit Danmark (RD) is a wholly owned subsidiary of Danske Bank, the largest
financial institution in Denmark, originated in 1871. Today, Danske Bank is a global bank
with activities in northern Europe and the Baltic region under various brands. In 2006,
Danske Bank acquired Sampo Bank in Finland. Its main business areas are retail banking,
corporate banking, asset management, life insurance and pensions and mortgage finance.
RD was established in 1851 under the name Østifternes Kreditforening. In 2001, RD
merged with Danske Kredit A/S and BG Kredit A/S following the merger of Danske
Bank A/S and RealDanmark A/S. RD is the continuing mortgage credit arm of the
Danske Bank Group and the second-largest specialist mortgage bank in Denmark, with a
loan portfolio market share of 29%. RD was the first to issue CRD-compliant covered
bonds under the revised Danish Covered Bond Act.
On 23 June 2011, RD announced that it would terminate its collaboration with Moody’s.
The decision came after Moody’s, as a result of model calculations, demanded that RD
provided additional excess cover of DKK32.5bn. In the same statement, RD announced
the opening of a new capital centre for the financing of adjustable rate mortgages
(ARM). RD also announced that existing ARMs – issued out of RD’s Capital Centre S –
were to be refinanced into the new Capital Centre T starting from the refinancing auctions
set for December 2011.
RD’s covered bonds issued out of Capital Centre S and T and the General Capital Centre
are rated AAA by Standard & Poor’s. For more rating details, see Chapter 4.
Financial performance
Table 9. Ratings (M/S/F)
Covered bond rating
Issuer rating
WR/AAA/-/A/-
Source: Rating agencies, Danske Markets
Table 10. Financial information
(Danske Bank)
DKKm
2011
2010
Net interest income
33,341
7,726
Fees and commissions
-3,326
Net gains/losses
17,390
Pre-provision income
Loan losses and provisions 13,185
4,205
Operating profit
60%
Cost/income ratio
16.0%
Core capital ratio
17.9%
Total capital ratio
0.46%
Arrears rate (RD)
161
Repossessed properties
35,983
8,089
5,984
20,267
13,817
6,450
56%
14.8%
17.7%
0.63%
164
Source: Danske Markets
Table 11. Further information
Bond ticker
Website
DANBNK
www.danskebank.com
Source: Danske Markets
Danske Bank reported an operating profit of DKK4.2bn in 2011, down 35% y/y from
DKK6.5bn in 2010. This result was lower than expected due to considerable financial
turbulence and economic downturn in the second half of the year. Net interest income
declined from DKK36.0bn to DKK33.3bn but increased in the latter part of the year as
Danske Bank Group raised lending rates. Loan losses and provisions fell from
DKK13.8bn to DKK13.2bn. The Danish activities posted larger-than-expected charges
and the difficult market conditions persisted in Ireland and Northern Ireland.
The core capital ratio increased from 14.8% as of 31 December 2010 to 16.0% as of 31
December 2011 and the total capital ratio increased from 17.7% to 17.9%. The arrears
rate (three months) for RD decreased from 0.63% as at end-2010 to 0.46% as at end2011. The number of repossessed properties decreased from 164 to 161.
Business model and funding profile
RD is a specialist mortgage bank subject to supervision by the Danish FSA. RD’s
objective is to carry out business as a mortgage bank, including any kind of business
permitted by the Danish Mortgage Act. RD’s principal market is Denmark. In addition,
RD provides loans secured on real estate in the Faroe Islands, Greenland and Sweden and
has previously provided loans secured on property in France, the UK and Germany. RD’s
core markets in Denmark are residential housing – defined as lending for the financing of
owner-occupied housing and holiday homes – and the corporate market, which comprises
loans to customers with property in urban trade, agriculture and residential rental
property.
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All mortgages included in the cover pool are distributed through the branch networks of
Danske Bank, the joint finance centres and the wholly owned real estate agent ‘home’ in
Denmark.
A management agreement exists between RD and Danske Bank, stating the following.



The branch that originated the mortgages is responsible for all handling of customers.
Danske Bank covers all losses (with a LTV of 60-80%) on mortgages originated at
Danske Bank branches.
RD receives all payments directly from customers. In turn, RD pays provisions to
Danske Bank.
As at the end of 2011, loss guarantees issued by Danske Bank amounted to DKK49bn.
This amount includes DKK8bn in the form of supplementary collateral for mortgage
covered bonds. All mortgages are transparent (pass-through), which means that
consumers have a delivery option on the underlying bonds. Interest reset loans are funded
by a portfolio of fixed-rate non-callable bonds, while other types of mortgages are funded
individually by issuing bonds with exactly the same characteristics as the mortgages.
Table 12. Funding profile
(Danske Bank)
Retail deposits
27%
Corporate deposits
11%
Market funds
27%
Trading portfolio liabilities
20%
Liab. under insurance contracts
7%
Other
1%
Subordinated debt
2%
Equity
4%
Source: Danske Markets
Table 13. Cover pool info – CC S
Capital Centre S
DKK504bn
WA Indexed LTV
69% LTV
LTV > 80%
5%
Arrears (3 months)
0.5%
Mortgages backing covered bonds issued by RD are divided into different cover registers
(capital centres). According to the revised Mortgage Act, new SDROs must be issued out
of separate capital centres. Therefore, since July 2007, SDROs have been issued out of
the new Capital Centre S; existing series in the General Capital Centre were closed at the
end of 2007. The existing series will be grandfathered according to the Capital
Requirement Directive (CRD). The majority of the entire mortgage book is included in
Capital Centre S. However, RD announced last year that all existing ARMs would be
refinanced into the new Capital Centre T, starting from the refinancing auctions set for
December 2011. Hence, we expect the volume of Capital Centre S to decrease gradually
in the coming years.
IO-mortgages
62%
Cover pool and asset quality
- Agriculture
As at end-2011, the cover pool for Capital Centre S totalled DKK504bn and comprised
primarily Danish-based mortgages. These are secured on private (59%), rental residential
(15%) and commercial mortgages (17%). Of the assets in the pool, 13% carry a fixed
interest rate and IO loans amount to 62%. Geographically, the pool is well diversified
across Denmark, with 37% of the loan portfolio located in the Copenhagen area. The pool
has a weighted-average LTV of 68.5%. The LTV is capped at 80% for residential and
60% for commercial mortgages.
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Fixed rate loans
Geography
13%
Primarily
Denmark
- Copenhagen area
37%
- Other Zealand
18%
- Western region
26%
- Southern region
19%
Asset type
- Private
59%
- Rental residential
15%
- Commercial
17%
Source: Risk report Q4 11 from Realkredit
Danmark, Danske Markets
www.danskeresearch.com
9%
Handbook 2012
Nykredit/Totalkredit
Company profile
Nykredit Realkredit (NYK) is a wholly owned subsidiary of Nykredit Holding, the thirdlargest financial institution in Denmark. Nykredit Holding is an unlisted holding company
owned by Foreningen Nykredit (90%), Industriens Realkreditfond (5%), Foreningen
Østifterne (3%) and PRAS (2%). As a mortgage association, NYK originated in 1851.
Today, besides mortgage finance, NYK is active in retail and corporate banking, asset
management, insurance and real estate. Mortgage finance is the most important business
area, with mortgages accounting for over 75% of total assets.
In 2003, NYK acquired Totalkredit (TOT), which is currently a wholly owned subsidiary
of NYK. Following the acquisition of TOT, NYK became the largest specialist mortgage
bank in Denmark with a current market share based on outstanding mortgages of 45%.
There are nearly 100 banks (with over 1,000 branches) in the TOT corporation network,
making it crucial for the distribution of NYK mortgages. NYK and both local and
regional banks are competitors in agricultural mortgage and non-mortgage markets. In
2008, NYK acquired Forstædernes Bank, which increased NYK’s market share within
banking to 5.2%. Forstædernes Bank has subsequently been merged with Nykredit Bank.
Nykredit’s covered bonds issued out of Capital Centre E and H are rated Aaa and Aa1,
respectively, by Moody’s and AAA by S&P. Nykredit has an A2/A+ long-term rating
from Moody’s/S&P. However, Nykredit announced on 13 April 2012 its decision to
terminate the rating agreement with Moody’s. Hence, the ratings from Moody’s are
expected to be withdrawn in the near future. For more rating details, see Chapter 4.
Table 14. Ratings (M/S/F)
Covered bond rating – CC E:
Aaa*/AAA/-
Covered bond rating - CC H
Aa1*/AAA/-
Issuer rating:
A2*/A+/-
* Nykredit has terminated the rating agreement
with Moody’s
Source: Rating agencies, Danske Markets
Table 15. Financial information
DKKm
Net interest income
2011
2010
10,103 11,210
Fees and commissions
257
554
Net gain/losses
-1.935
-559
Loan losses & provisions
1,141
2,382
Operating profit
1,338
3,090
Cost/income ratio
62%
58%
Core capital ratio
13.9%
15.1%
Total capital ratio
17.1%
18.5%
0.6%
0.6%
347
273
Arrears rate
Repossessed properties
Source: Nykredit, Danske Markets
Financial performance
Nykredit Group reported operating profit of DKK1.3bn in 2011 – a significant decrease
from the 2010 level of DKK3.1bn. Net interest income declined from DKK11.2bn to
DKK10.1bn and loan losses and provisions fell from DKK2.4bn to DKK1.1bn.
Table 16. More info
The core capital ratio decreased from 15.1% as of 31 December 2010 to 13.9% as of 31
December 2011 and the total capital ratio decreased to 18.5% from 17.1%. The arrears
rate (75 days) was 0.6% – unchanged from the 2010 level. The number of repossessed
properties increased from 273 to 347.
Source: Danske Markets
Bond ticker
Website
NYKRE
www.nykredit.com
Business model and funding profile
NYK is a specialist mortgage bank subject to supervision by the Danish FSA. Banking,
asset management and insurance activities are carried out by wholly owned separate
subsidiaries of NYK. As mentioned above, TOT is also a wholly owned subsidiary of
NYK. Under the Nykredit brand, retail and commercial customers are offered mortgages
through Nykredit’s distribution channels, which include 57 centres, two call centres,
nykredit.dk, a central customer services centre and the real estate agencies of the Nybolig
and Estate chains. Like NYK, TOT is a specialist mortgage bank under the supervision of
the Danish FSA.
In 1994, TOT was established as a joint mortgage bank by local and regional banks in
Denmark. Since the acquisition of TOT in 2003, NYK has developed a partnership with
Danish local and regional banks with substantial distribution networks including over
1,000 branches. Mortgage products under the Totalkredit brand are sold through these
local and regional banks. The vast majority of growth in mortgage lending is delivered by
local and regional banks.
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Denmark is the largest market for NYK and TOT. In addition, NYK provides loans
secured by residential property in Poland, France and Spain. TOT only offers mortgages
secured on residential property, while NYK’s core markets in Denmark are in residential
housing and commercial properties, which comprise loans to customers for urban trade,
agriculture and residential rental properties.
A management agreement exists between NYK/TOT and the local and regional banks.
The agreement states the following.

The branch that originated the mortgage is responsible for all handling of customers.

The bank that originated the mortgages covers all losses (LTV between 60% and
80%) on mortgages originated by the said bank.

TOT receives all payments directly from customers. In turn, TOT pays provisions to
the banks.
Table 17. Funding profile
Market funds (match-funded bonds)
73%
Corporate deposit
8%
Retail deposits
4%
Other
9%
Subordinated debt
1%
Equity
4%
Source: Nykredit, Danske Markets
Table 18. Cover pool info – CC E
Capital Centre E
Junior covered bonds
DKK435bn
DKK26bn
WA LTV
69%
Since 2006, NYK and TOT have been jointly funded, so all mortgages originated by
NYK or TOT are funded by covered bonds issued out of NYK Capital Centre D. TOT has
a similar Capital Centre D, which is subject to the same terms as NYK’s Capital Centre
D. The model for joint funding is based on lending out of TOT’s Capital Centre D funded
by issuing covered bonds from Capital Centre D in NYK.
Fixed rate loans
24%
IO-loans
60%
According to the revised Mortgage Act, new SDOs must be issued out of separate capital
centres. Therefore, since 1 January 2008, NYK/TOT has issued SDOs out of a new
capital centre – E, with existing series in Capital Centre D closed at the end of 2007. The
series in Capital Centre D were grandfathered according to the Capital Requirement
Directive (CRD). Nykredit announced in June 2011 that existing ARMs – issued out of
Capital Centre E – would be refinanced in to the new capital centre H starting from the
refinancing auction in September 2011. Hence, going forward, joint funding will be
carried out from Capital Centre E for the fixed rate loans and Capital Centre H for the
ARM loans.
-Funen
8%
-International
6%
In addition, Nykredit has announced it will introduce two-tier mortgaging for residential
borrowers (it introduced two-tier mortgaging for commercial borrowers in 2009) in Q2
12, when all new loans will be funded using SDO covered bonds up to a LTV of probably
60%, while the top 20% will be funded using RO bonds.
Cover pool and asset quality
As at the end of 2011, NYK’s Cover Pool E and H totalled DKK435bn and DKK240bn,
respectively, of which 95% was Danish-based mortgages. These are secured on
residential (72%/61%), agricultural (4%/14%) and commercial properties (10%/13%).
The cover pools have a weighted-average LTV of 69% and 64%, respectively. Of all
mortgages in Capital Centre E, 24% carry a fixed rate whereas Capital Centre H consists
of 100% ARMs.
Geography
-Copenhagen area
26%
-Remaining Sealand
9%
-Jutland region
50%
Asset type
-Owner-occupied
72%
-Private rental
8%
-Non-profit housing
5%
-Commercial
10%
-Agriculture
4%
-Other
1%
Source: Risk report Q4 11 from Nykredit, Danske
Markets
Table 19. Cover pool info – CC H
Capital Centre H
Junior covered bonds
WA LTV
Fixed rate loans
IO-mortgages
DKK240bn
DKK5bn
64%
0%
71%
Geography
-Copenhagen area
-Remaining Zealand
-Jutland region
26%
8%
53%
-Funen
8%
-International
5%
Asset type
-Owner-occupied
-Private rental
-Non-profit housing
61%
9%
1%
-Commercial
13%
-Agriculture
14%
-Other
1%
Source: Risk report Q4 11 from Nykredit, Danske
Markets
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Nordea Kredit
Company profile
Nordea Kredit Realkreditaktieselskab (NOR) is a wholly owned subsidiary of Nordea
Bank Danmark, which forms part of the Nordea Group. Nordea was established relatively
recently, in 2000. In 1997, Swedish Nordbanken merged with Finnish Merita Bank to
form MeritaNordbanken. In 2000, Danish Unibank merged with MeritaNordbanken,
which, at the same time, changed its name to Nordea. Later in 2000, the Norway-based
Christiania Bank joined the newly formed Scandinavian banking group. Today, Nordea is
the largest bank in Scandinavia with activities in Scandinavia, the Baltic region, Poland
and Russia.
Table 20. Ratings (M/S/F)
Covered bond rating
Issuer rating
Aaa/AAA/Aa3/AA-/AA-
Source: Rating agencies, Danske Markets
Table 21. Financial info (parent bank)
EURm
2011
2010
Net interest income
5,456
5,159
Fees and commissions
2,395
2,156
NOR began its mortgage activities in September 1993. Initially, it provided only lending
for residential properties and holiday homes. Currently, however, mortgage loans are
offered for most types of property. NOR’s share of the domestic mortgage market is 11%
(stock).
Net gain/losses
1,517
1,837
Pre-provision income
4,282
4,518
55%
52%
The bank’s corresponding long-term ratings by Moody’s, S&P and Fitch are Aa3, AAand AA-, respectively. Covered bonds issued by NOR have Aaa and AAA ratings from
Moody’s and S&P, respectively. Nordea Kredit was placed on review for further
downgrade on 15 February 2012. However, the covered bonds are on Stable Outlook. For
more rating details, see Chapter 4.
Core capital ratio
10.1%
9.8%
Total capital ratio
11.1%
11.5%
0.3%
0.5%
131
115
Nordea’s main business areas include retail banking, corporate banking, asset
management, life insurance and pensions and mortgage finance.
Loan losses & provisions
Operating profit
Cost/income ratio
Arrears rate (NOR)*
Repossessed properties
735
879
3,547
3,639
* Residential properties and holiday homes
Source: Nordea, Danske Markets
Financial performance
Nordea Group reported operating profit of EUR3.5bn for 2011, a slight decrease from the
2010 level of EUR3.6bn. Net interest income increased from EUR5.2bn to EUR5.5bn and
loan losses and provisions fell from EUR0.9bn to EUR0.7bn. The core capital ratio
increased from 9.8% as of 31 December 2010 to 10.1% as of 31 December 2011 and the
total capital ratio decreased from 11.1% to 11.5%.
Table 22. More info
Bond ticker:
Website
UNIKRE
www.nordea.com
Source: Danske Markets
The arrears rate (3.5 months) for residential properties and holiday homes for Nordea
Kredit was 0.3% as at end-2011, down from 0.5% as at end-2010. The number of
repossessed properties increased from 115 to 131.
Business model and funding profile
NOR is a specialist mortgage bank subject to supervision by the Danish FSA. The
objective of NOR is to carry on business as a mortgage bank, including any kind of
business permitted pursuant to the Danish Mortgage Act. NOR only has mortgage credit
activities in Denmark, while all mortgages in the cover pool are secured on properties
situated in Denmark. All mortgages included in the cover pool are distributed through
Nordea’s branch network and that of the real estate chain, DanBolig, which is a wholly
owned subsidiary of Nordea Danmark.
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A management agreement exists between NOR and Nordea Bank Danmark. It states the
following: Nordea Bank Danmark A/S provides a guarantee for the upper 25% of
mortgage loans originated by the bank. For loans granted for non-profit housing, youth
housing and housing for the elderly, there is only a 10% guarantee. For loans for all-year
dwellings, co-operative housing, private rental housing, non-profit rental housing and
properties for social, cultural and educational purposes, the guarantee covers that part of
the mortgage loan that exceeds 60% of the valuation made in conjunction with the loan
origination process. For loans granted to agricultural properties, the guarantee covers that
part of the mortgage loan that exceeds 55% of the valuation made in conjunction with the
loan origination process.
For loans granted to recreational dwellings, industrial and craftsmen’s properties, office
and retail properties and collective energy supply plants, the guarantee covers that part of
the loan that exceeds 45% of the valuation made in conjunction with the loan origination
process. The guarantee remains in force for 10 years from the disbursement of the loan.
For loans granted to owner-occupied, all-year and recreational dwellings, the guarantee
remains in force for only five years.

The branch that originated the mortgage is responsible for all customer handling.

NOR receives all payments from customers directly. In turn, NOR pays provisions to
Nordea Bank Denmark.
As at the end of 2011, guarantees from Nordea Bank Danmark A/S covered loans worth
DKK265bn, of which guarantees amounted to DKK73bn.
The mortgages backing the covered bonds issued by NOR are divided into different cover
pools (capital centres). According to the revised Mortgage Act, new SDROs must be
issued out of separate capital centres. Therefore, at the end of 2007, NOR closed and
subsequently grandfathered the existing series, according to the Capital Requirement
Directive (CRD) and new SDROs have been issued out of Capital Centre 2. Capital
Centre 2 holds 76% of the total mortgage book.
Cover pool and asset quality
Table 23. Cover pool info – CC 2
As at 31 December 2011, Capital Centre 2 totalled DKK341bn and consisted entirely of
Danish-based mortgages. These are secured mainly on residential (69%) mortgages,
followed by agricultural (13%) and commercial (11%). Of all mortgages, 40% carry a
fixed rate, 57% are interest-reset loans and the remaining are capped floaters. The average
indexed LTV ratio in NOR’s cover pools is 70%.
Capital Centre 2
DKK341bn
WA Indexed LTV
70%
Fixed rate loans
40%
IO-loans
Geography
57%
Denmark
-Copenhagen area
21%
-Zealand
36%
-Funen
-Jutland
5%
39%
Asset type
- Owner-occupied
- Rental
69%
6%
- Commercial
11%
- Agriculture
13%
- Other
2%
Source: Risk report Q4 11 from Nordea Kredit,
Danske Markets
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Handbook 2012
BRFkredit
Company profile
BRFkredit is the only entirely independent specialist mortgage bank operating in Denmark.
It is wholly owned by BRFfonden, an independent business foundation, through holding
company BRFholding. BRF was established in 1959 as an independent business foundation
authorised to grant third-lien mortgages. Originally, it was intended that BRFkredit grant
mortgage loans for specific purposes. Today, it is an independent specialist mortgage bank
providing customers with financial solutions and other services connected with real estate.
Being owned by a foundation, BRFkredit’s financial goal is to generate sufficient earnings
to ensure the continued and competitive development of the company.
In 1995, BRFkredit established BRFbank, currently a wholly owned subsidiary of
BRFkredit. Its objective is to support the activities of BRFkredit by offering products to
supplement mortgage loans in connection with new building projects, property
transactions and remortgaging of existing home loans. Less than 10 years ago, BRFkredit
was the third-largest mortgage bank in Denmark but over the past couple of years it has
lost market share due to weak distribution. Today, BRFkredit is the smallest player in the
retail market (by net new lending), with a market share of 6.5% (down from 7.0% in
2010). BRFkredit issues covered bonds (særligt dækkede obligationer [SDO]) in the form
of traditional pass-through callable bonds and bullet bonds. In addition, BRFkredit
adheres to the general balance principle.
On 10 June 2011, Moody’s lowered the TPI for several Danish covered bond
programmes, including the one from BRFkredit, from Very High to High. On 1 July
2011, BRFkredit’s issuer rating was downgraded from Baa1 to Baa3 by Moody’s due to
concerns regarding exposure to commercial real estate, where arrears have increased
significantly. Simultaneously, the rating of the SDOs issued by BRFkredit was lowered
from Aa1 to Aa2, which, due to the decrease in TPI, is the maximum attainable covered
bond rating for the current issuer rating. ROs retained their Aa3 rating.
Table 24. Ratings (M/S/F)
Covered bond rating
WR/AAA/-
Issuer rating:
WR/A-/-
Source: Rating agencies, Danske Markets
Table 25. Financial information
DKKm
2011
2010
Net interest income
1,685
1,644
Fees and commissions
-73
-45
Net gain/losses
-104
-269
Pre-provision income
667
843
Loan losses & provisions
459
471
Operating profit
127
21
Core capital ratio
16.3%
13.7%
Total capital ratio
16.0%
13.5%
0.7%
1.0%
237
260
Arrears rate
Repossessed properties
Source: BRFkredit, Danske Markets
Table 26. More info
Bond ticker
Website
Source: Danske Markets
On 6 July, following the downgrade of its SDOs, BRFkredit announced its decision to
(1) open a new SDO Capital Centre H for the issuance of loans for refinancing purposes
(primarily ARM loans) and (2) initiate a dialogue with S&P about the rating of
BRFkredit’s capital centres.
In October 2011, S&P assigned BRFkredit a long-term issuer rating of A- and a AAA for
covered bonds issued out of Capital Centres B and E. BRFkredit’s covered bonds issued
out of the General Capital Centre received a AA- rating from S&P in March 2012. For
more rating details, see Chapter 4.
BRFkredit participates in the Danish Bank Package II, under which BRFkredit has been
approved for issuance of state-guaranteed junior covered bonds or senior debt for a total
of DKK20bn.
Financial performance
BRFkredit reported an operating profit of DKK127m in 2011, an increase from the 2010
level of DKK21m. Net interest income increased slightly from DKK1.6bn to DKK1.7bn
and loan losses and provisions were more or less unchanged compared with the 2010 level
at DKK0.5bn. The core capital ratio increased from 13.7% as of 31 December 2010 to
16.3% as of 31 December 2011 and the total capital ratio increased from 13.5% to 16.0%.
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BRF
www.brf.dk
Handbook 2012
The arrears rate (105 days) was 0.65% as at end-September 2011, down from 1.04% in
2010. The number of repossessed properties decreased from 260 to 237.
Business model and funding profile
BRFkredit is a specialist mortgage bank subject to supervision by the Danish FSA.
BRFkredit offers mortgages through several partnerships. For example, BRFkredit has
entered into agreements with Realmæglerne and a range of independent real estate
agencies. In addition, on 7 February 2012, BRFkredit, Jyske Bank and Sydbank entered
into an agreement on joint funding of the two banks’ loans on private residential
properties. It also distributes mortgages through its website (www.brf.dk) and directly
from its headquarters.
BRFkredit offers only mortgages secured on properties in Denmark, specialising in those
used for residential properties and office and shop premises. Loans for residential
properties, including owner-occupied homes, co-operative homes, rental homes and
publicly subsidised housing projects, comprise most of the total mortgage book.
Table 27. Funding profile
Total assets
DKK231bn
Retail deposits
2%
Corporate deposits
2%
Market funds (match-funded)
86%
Other
4%
Subordinated debt
1%
Equity
4%
Source: BRF, Danske Markets
BRFkredit offers interest reset loans (61%), fixed rate callable loans (22%), floaters
(10%, of which some include a cap) and a small share of others (7%). All mortgages are
based on the pass-through principle, which provides consumers with a delivery option on
the underlying bonds. Interest reset loans are financed by issuance of a fixed rate noncallable bond portfolio, while other types of mortgages are funded individually by issuing
bonds with identical characteristics to those of the corresponding mortgages.
Mortgage-backed covered bonds issued by BRFkredit are divided into different cover
registers (capital centres). Approximately 45% of the entire mortgage book is included in
Capital Centre B, with covered bonds issued until the end of 2007. Bonds issued prior to
31 December 2007 are grandfathered to the CRD. New ROs (Realkreditobligationer) are
also issued from Capital Centre B but they do not comply with the CRD and hence do not
get preferential treatment in terms of risk weighting. According to the revised Mortgage
Act, any new SDOs must be issued out of separate capital centres and new SDOs (55% of
total mortgages) are issued out of new Capital Centre E.
Cover pool and asset quality
At end of 2011, BRFkredit’s cover pool E stood at DKK110bn, made up of 99% Danishbased loans. The average LTV ratio is 75%. Loans are well diversified; however, the
majority of the properties (45%) are located in the Copenhagen area. Of the cover pool, 54%
is residential property and 13% is commercial. Fixed-rate assets constitute 11% of the pool.
Table 28. Cover pool info – CC E
Capital Centre E
DKK110bn
Junior covered bonds
DKK4.5bn
WA LTV
75%
Fixed-rate loans
11%
IO loans
Geography
56%
99% Denmark
-Copenhagen area
45%
-Zealand
15%
-Northern region
5%
-Central region
16%
-Southern region
17%
Asset type
-Residential
54%
-Subsidised
16%
-Private rental housing
14%
-Commercial
13%
-Other
Source: Risk and Capital Management Report
2011 from BRF and Danske Markets.
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1%
Handbook 2012
DLR Kredit
Company profile
Dansk Landbrugs Realkreditfond (DLR) is a Danish mortgage lender, specialised in
agricultural and commercial mortgages. DLR was founded in 1960 on the initiative of the
banks and savings banks associations (now the Danish Bankers Association). DLR’s
formation was driven by farmers’ requirements for long-term capital in the 1950s, which
were covered only partially by first- and second-lien mortgage banks. Lack of funding
resulting from hesitant lending policies of first- and second-lien mortgage banks led in
part to the establishment of DLR, which was allowed to operate with a loan-to-value ratio
of 70% of DLR’s valuation of the mortgaged property.
Between its establishment in 1960 and 1 July 2000, DLR operated on its own individual
legal basis pursuant to the DLR Act. DLR’s exclusive right to grant loans based on a LTV
ratio of 45-70% was abandoned from 1 January 1999. DLR became subject to the
Mortgage Credit Act as of 1 July 2000 and in 2001 it became a company limited by
shares. Shares in DLR are held by 99 local and regional banks and savings banks (+1,000
branches across Denmark). The main shareholders are members of the Association of
Local Banks (66%), members of the Association of Regional Banks (20%), Financial
Stability Company (including Amagerbanken, Fjordbank Mors and Max Bank) (11%)
and Nykredit Realkredit A/S (3%). As well as providing mortgage loans, DLR has
managed the loan portfolio of LR Realkredit (majority owned by Nordea, Danske Bank,
SEB and Arbejdernes Landsbank) since 1994. DLR takes no credit risk on this portfolio.
DLR’s market share was 5.5% as at the end of 2011. If we look at DLR’s main lending
areas (agriculture, office and business properties, private rental housing properties and
private co-operative housing properties), the market share was 16%.
In 2009, DLR implemented a significant strengthening of its capital base through both a
government hybrid core capital injection and an increase in DLR’s share capital and the
total capital ratio increased by two percentage points.
Table 29. Ratings (M/S/F)
Covered bond rating:
Issuer rating:
Aa1/-/Baa1(n)/-/-
Source: Rating agencies, Danske Markets
Table 30. Financial info
DKKm
2011
Net interest income
1,242
857
Fees and commissions
-298
-278
Net gain/losses
-259
33
Pre-provision income
510
443
Loan losses & provisions
141
106
Operating profit
369
336
Cost/income ratio
48%
47%
Core capital ratio
12.2%
12.0%
Total capital ratio
12.2%
12.0%
1.6%
1.9%
51
28
Arrears rate
Repossessed properties
Source: DLR Kredit, Danske Markets
Table 31. More info
Bond ticker
Website
Source: Danske Markets
Moody’s downgraded DLR’s issuer rating from A1 to A3 in November 2009 as a direct
consequence of a new rating approach towards specialist banks owned by multiple
owners; hence the downgrade was not due to a deterioration of credit quality. On 1 July
2011, Moody’s further cut DLR’s long-term rating from A3 to Baa1, due to a perceived
weakened financial strength of DLR’s banks.
On 28 July 2011, DLR’s TPI was lowered from ‘High’ to ‘Probable High’ and DLR’s
covered bonds were placed on ‘review for downgrade’. DLR’s issuer rating was placed
on review for further downgrade on 15 February 2012. DLR is not rated by S&P. For
more rating details, see Chapter 4.
Financial performance
DLR Kredit A/S reported operating profit of DKK369m in 2011 – a slight increase from
the 2010 level of DKK336m. Net interest income increased quite significantly from
DKK857m to DKK1.2bn. Loan losses and provisions increased from DKK106m to
DKK141m. The core capital ratio increased from 12.0% to 12.2%.
The arrears rate (3.5 months) was 1.6% as at end-2011, down from 1.9% as at end-2010.
The number of repossessed properties increased from 28 to 51.
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2010
www.danskeresearch.com
LANDBR
www.dlr.dk
Handbook 2012
Business model and funding profile
DLR is a specialist mortgage bank subject to supervision by the Danish FSA. DLR
provides mortgages through the branch networks of its 99 shareholder banks. DLR has no
branches itself. DLR only offers mortgages secured on properties in Denmark. It focuses
on mortgages on agricultural and commercial properties as well as co-operative homes,
rental homes and publicly subsidised housing projects. The bank offers interest reset
loans (69%), fixed rate callable loans (14%), floating rate loans (15%) and capped
floaters (2%). All mortgages are based on the pass-through principle, meaning that
consumers have a delivery option on underlying bonds. Interest reset loans are funded by
issuing a portfolio of fixed rate, non-callable bonds, while other types of mortgages are
funded individually by issuing bonds with exactly the same characteristics as the
mortgages.
Table 32. Funding profile
Market funds (match-funded)
84%
Corporate deposits
4%
Other
3%
Subordinated debt
4%
Equity
5%
Source: DLR, Danske Markets
DLR has a management agreement with all shareholder banks, which requires loanproviding banks to put up an individual loan loss guarantee covering the most risky part
of each mortgage. The agreement includes all commercial properties. As a result, DLR’s
risk of losses arising from the granting of loans for the property types mentioned is very
limited. Loans for agricultural properties are also protected by a collective guarantee
scheme set up between DLR and the loan-providing banks, which comes into force in the
event that the losses suffered by DLR within a given financial year exceed a given level.
The guarantee scheme means that DLR’s risk of losses arising from the granting of loans
for agricultural properties is relatively limited. As at the end of 2011, the guarantee
scheme covered 93% of DLR’s total loan portfolio; the remaining loans often have a very
low LTV.
Mortgage-backed covered bonds issued by DLR are divided into different cover registers
(capital centres). According to the revised Mortgage Act, any new SDOs must be issued
out of separate capital centres. By the end of 2007, DLR closed and subsequently
grandfathered the existing series in Capital Centre A, according to the Capital
Requirement Directive (CRD), with new SDOs issued out of new Capital Centre B.
Cover pool and asset quality
As at March 2011, DLR’s cover pools totalled DKK132bn and consisted mainly of
Danish-based assets, distributed as 64% in residential assets and 16% in commercial
assets. All assets are geographically well diversified with a slight tendency to be
concentrated in Jutland. LTVs are capped at 80% for the residential assets and 60% for
the commercial part of the pool.
Approval of mortgages by DLR is based on a strict credit policy. Only mortgages on
properties stated in the Mortgage Act are allowed in the cover pool. The LTV ratio on
each mortgage is monitored on an ongoing basis while the borrower’s ability to pay is
reviewed each month.
Table 33. Cover pool info
DLR Kredit
DKK132bn
-
WA LTV
Fixed rate loans
17%
IO-loans
Geography
62%
99% Denmark
-Copenhagen area
8%
-Zealand
13%
-South Denmark
29%
-Jutland
50%
-International
1%
Asset type
-Owner-occupied
6%
-Commercial
16%
-Rental housing
10%
-Co-operative housing
3%
-Other
1%
Source: Annual report 2011 from DLR and
Danske Markets
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10 May 2012
64%
-Agricultural
www.danskeresearch.com
Handbook 2012
4. Rating
During its more than 200-year history the Danish covered bond (mortgage bond) market
has survived several occasions of economic and political turmoil, including the
bankruptcy of the Kingdom of Denmark in 1813 and the depression of the 1930s, with no
record of a mortgage bank defaulting on its payments. This is attributable mainly to the
legislative framework, which, from an early stage in the development of the market, has
put great emphasis on the protection of the mortgage bond investor by imposing strict
limits on the risk taking of the mortgage bank.
The Danish covered bond legislative framework is recognised as one of the strongest in
the world, with high systemic support. In particular, the almost non-existent market risk,
eliminated by the balance principle, is a major advantage for traditional Danish covered
bonds. According to Standard & Poor’s (S&P) new rating methodology, Danish covered
bonds belong in its best category (no. 1) and the asset and liability mismatch risk
(ALMM) has so far also been categorised in the best category (ALMM low), giving
Danish covered bonds the possibility of the highest uplift in covered bond rating (seven
notches above issuer rating).
Table 34. Jurisdiction categorisation
Jurisdiction
Category 1
Category 2
Category 3
Denmark
Canada
US
France (OF)
Finland
Germany
France (OH)*
Spain
Ireland
Sweden
Italy
Luxembourg
Netherlands
Norway
Portugal
UK
* With the exception of BPCE SFH, which is classified under category 1
Note: OF = Obligations foncieres, OH = Obligation de Financement de l’Habitat
Source: Standard & Poor’s
Until June 2011, Danish covered bonds issued by mortgage banks enjoyed the best
Timely Payment Indicator (TPI) possible at Moody’s (‘Very High’). However, Moody’s
changed this one step down to ‘High’ due to the increased use of loans with embedded
refinancing (in contrast to loans where the maturity of the loan is exactly matched by the
maturity of the bond). For specialist lender DLRkredit, this was further reduced to
‘Probable-High in July 2011. Despite the adjustment, the TPI of Danish mortgage banks
still compares favourably with other jurisdictions as can be seen from the table below,
which illustrates the typical TPI within selected countries. Following the TPI revision,
Realkredit Danmark (RD) and BRFkredit have terminated the collaboration with
Moody’s and Nykredit announced on 13 April 2012 that it had decided to end the rating
agreement with Moody’s.
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Handbook 2012
Table 35. Typical country TPI
Very Improbable
Improbable
Probable
Probable-High
High
Greece
Portugal
Austria (mortgage)
Austria (public)
Denmark (ex-Danske)
Hungary
Denmark (Danske)
France (OF)
Germany (public)
Ireland
Finland
Germany (mortgage)
Norway (savings banks)
France (OH)
Spain (public)
Very High
Italy
Netherlands
Norway (DNB Nor)
Spain (mortgage)
Sweden
Switzerland
UK
Source: Moody’s, Danske Markets
Each mortgage bank has a number of different capital centres and the covered bond
ratings from Standard & Poor’s, Moody’s and Fitch are on the Capital Centres and
classification (RO/SDO/SDRO/JCB). For example, Realkredit Danmark’s General
Capital Centre for the grandfathered RO bonds issued before the implementation of the
new Mortgage Act in 2007 are rated AAA by Standard & Poor’s. The SDRO bonds in
Capital Centres S and T issued after the implementation of the new Mortgage Act are also
AAA by Standard & Poor’s.
Rating on the Capital Centres and
classification
Rating from Standard & Poor’s (S&P)
According to Standard & Poor’s (S&P) new rating methodology, Danish covered bonds
belong in its best category (no. 1) and the asset and liability mismatch risk (ALMM) has
been categorised in the best category (ALMM low).
All the major Danish mortgage banks such as Realkredit Danmark, Nykredit, Nordea
Kredit and BRFkredit have AAA ratings on the most traded capital centres and in the last
year there has been an increased incentive for mortgage banks to obtain a rating from
S&P.
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Handbook 2012
Table 36. Rating overview – Standard & Poor’s
Rating
Capital centre
Classification
Realkredit Danmark
Current
(issuer/CB)
Outlook
A
Negative outlook
Stable outlook
Capital centre S
SDRO
AAA
Capital centre S
JCB
Not rated
Target
Actual
WAFF
WALS
CE
CE
Low
22.29%
28.63%
6.81%
7.21%
ALMM risk
General capital centre Grand RO
AAA
Stable outlook
Low
16.38%
25.27%
4.99%
6.70%
Capital centre T
SDRO
AAA
Stable outlook
Low
22.54%
25.40%
3.60%
6.66%
Capital centre T
JCB
Not rated
Danske Bank
A
Negative outlook
Register C
SDO
AAA
Stable outlook
Low
29.17%
23.03% 26.32%
32.50%
Register D
SDO
AAA
Stable outlook
Moderate
12.76%
33.02% 21.61%
23.25%
Register I
SDO
AAA
Stable outlook
Low
15.19%
17.60% 18.46%
21.45%
Nykredit Realkredit
A+
Stable outlook
Capital centre C
Grand RO
AAA
Stable outlook
Low
15.98%
11.37%
4.03%
5.50%
Capital centre D
Grand RO/New RO
AAA
Stable outlook
Low
18.91%
21.69%
4.03%
6.30%
Capital centre E
SDO
AAA
Stable outlook
Low
16.93%
28.78%
4.54%
7.42%
Capital centre E
JCB
A+
Stable outlook
Capital centre G
New RO
AAA
Stable outlook
Low
30.64%
82.89% 19.13%
23.35%
Capital centre H
SDO
AAA
Stable outlook
Low
21.13%
33.57%
5.36%
11.04%
Capital centre H
JCB
A+
Stable outlook
General capital centre Grand RO
AAA
Stable outlook
Totalkredit
A+
Stable outlook
AAA
Stable outlook
Low
12.38%
11.69%
1.85%
2.97%
Capital centre C
Grand RO
Nordea Kredit
Low
AA-
Stable outlook
Capital centre 1
Grand RO
AAA
Stable outlook
Low
14.59%
26.13%
6.42%
10.23%
Capital centre 2
SDRO
AAA
Stable outlook
Low
24.28%
32.45% 10.08%
16.46%
BRFkredit
A-
Stable outlook
Capital centre B
Grand RO
AAA
Stable outlook
Low
21.57%
33.08%
9.14%
9.18%
Capital centre E
SDO
AAA
Stable outlook
Low
22.85%
38.99% 10.76%
12.54%
Capital centre E
JCB
Not rated
Stable outlook
Low
19.13%
48.59% 14.92%
14.41%
General capital centre Grand RO
AA-
DLR Kredit A/S
Not rated
Capital centre B
SDO
Not rated
General capital centre Grand RO
Not rated
LR Realkedit A/S
Not rated
General capital centre Grand RO/New RO
Not rated
Note: GRAND RO = Grandfathered RO bonds issued before 2008, New RO = RO bonds issued after 2007, ALMM = asset-liability mismatch, WAFF = weighted-average
foreclosure frequency, WALS = weighted-average loss severity, CE = credit enhancement
Source: Global Covered Bond Characteristics and Rating Summary Q1 2012, rating updates
S&P defines the WAFF as the weighted-average foreclosure frequency. The foreclosure
frequency is a loan's probability of default leading to foreclosure. The estimated
foreclosure frequency is a function of borrower and loan characteristics as well as the
economic stress scenario commensurate with a certain rating level. If we look at the
WAFF for the SDO/SDRO capital centres for the Danish covered bonds, Nykredit’s
capital centre E has the lowest WAFF whereas Nordea Kredit’s capital centre 2 has the
highest WAFF.
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WAFF: weighted-average foreclosure
frequency
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Handbook 2012
WALS is the weighted-average loss severity. The loss severity quantifies the loss realised
as a result of foreclosure. The expected loss is predicated on assumptions about the
potential decline in the market value of collateral that may secure the asset, as well as the
expenses incurred in foreclosing on and reselling the property, considering an economic
stress scenario, commensurate typically with a certain rating level. The WALS is
generally higher in Denmark compared with the average for the rest of Europe, which is
due to a high share of commercial lending. However, the WAFF is comfortably lower
than the European average. Realkredit Danmark’s capital centre S has the lowest WALS
while BRFkredit’s capital centre E has the highest WALS.
WALS: weighted-average loss severity
If we look at the target credit enhancement required to hold a given covered bond rating
among the main SDO/SDRO capital centres for the Danish covered bonds, Nykredit’s
capital centre E generally has the lowest target CE whereas BRFkredit’s capital centre E
has the highest target CE.
CE: Credit enhancement
Rating from Moody’s
Besides the TPI revision, Moody’s in particular was very active on Danish issuers in
2011. Issuer ratings came under pressure mainly as a result of Moody’s changed view on
the Danish banking sector and the systemic support expected to be available for banks.
The failure of Amagerbanken highlighted that the Danish authorities would actively use
the power given in the Danish bail-in resolution implemented in October 2010 and
impose a loss on senior secured bondholders and depositors (above the depositor
guarantee scheme of DKK750,000). The failure of Amagerbanken triggered Moody’s to
reclassify Denmark from a being ‘High’ support country to a ‘Low’ support country in
terms of expected systemic support. Only four banks currently receive a one-notch uplift
from systemic support at Moody’s (Danske Bank, Jyske Bank, Nordea Bank Denmark
and Sydbank). Previously, Moody’s gave up to three notches of support. The removal of
systemic support incorporated in Danish issuer ratings was not countered by an uplift in
the stand-alone rating and hence issuers were downgraded by up to three notches.
In addition to taking action on current ratings and rating outlooks, Moody’s raised its
current over-collateralisation requirements for the various mortgage banks. The OC
requirements for maintaining existing ratings were raised to 12.0% for Nykredit and
14.0% for Nordea Kredit. This is a rather steep hike relative to Q1 11 when the OC
requirements were 4.5% and 6.0% for Nykredit and Nordea Kredit, respectively. The
many increases in OC requirements, which could lead to current ratings being
downgraded, have caused investor jitters and some Danish mortgage banks (Realkredit
Danmark and BRFkredit) have following the TPI revision in 2011 decided to end the
collaboration with Moody’s. Hence, Moody’s has withdrawn the ratings from Realkredit
Danmark and BRFkredit. In addition, Nykredit announced on 13 April 2012 that it had
decided to end the rating agreement with Moody’s and we expect Moody’s to withdraw
the ratings in the near future. The table below shows the recent rating details from
Moody’s.
Realkredit Danmark, BRFkredit and
Nykredit have in the last year
terminated rating agreements with
Moody’s
Moody’s rating approach is based on the expected loss (RL) model and the TPIs. In the
EL model, monthly probabilities of default and subsequent losses are used to determine a
rating. As the value of the cover pool is always expected to be positive, the covered bonds
are typically rated higher than the issuer.
Moody’s rating is based on the EL
Model and TPI
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Table 37. Rating overview – Moody's
Rating
Capital centre
TPI Collateral Current
Classification
(issuer/CB) Outlook
Capital centre S
SDRO
Withdrawn
Capital centre S
JCB
Not rated
TPI
Minimum OC
leeway
score
OC
requirement
Realkredit Danmark
General capital centre Grand RO
Withdrawn
Capital centre T
SDRO
Not rated
Capital centre T
JCB
Not rated
Danske Bank
A2
On review for downgrade
Register C
SDO
Not rated
Register D
SDO
Aaa
On review for downgrade
Probable
1
10.3%
16.1%
15.5%
Register I
SDO
Aaa
On review for downgrade
Probable
1
7.7%
30.4%
21.0%
0.0%
Nykredit Realkredit
A2
Capital centre C
Grand RO
Aa1
Very High
4
8.2%
4.7%
Capital centre D
Grand/New RO
Aa1
High
3
13.1%
5.7%
2.0%
Capital centre E
SDO
Aaa
High
2
10.2%
9.9%
10.0%
Capital centre E
JCB
A2
Capital centre G
New RO
Aa3
Probable High
4
72.5%
13.8%
9.5%
Capital centre H
SDO
Aa1
High
3
12.5%
5.6%
5.5%
Capital centre H
JCB
A2
High
3
14.9% 115.8%
2.0%
High
3
General capital centre Grand RO
Aa1
Totalkredit
A2
Capital centre C
Grand RO
Nordea Kredit
Nykredit announced on 13
April that it had decided to
terminate the rating
agreement with Moody's
Aaa
Aa3
On review for downgrade
4.6%
3.1%
3.0%
Capital centre 1
Grand RO
Aaa
Stable outlook
Very High
5
9.9%
9.4%
3.0%
Capital centre 2
SDRO
Aaa
Stable outlook
High
4
17.2%
14.8%
14.0%
Capital centre B
Grand RO
Withdrawn
Capital centre E
SDO
Withdrawn
Capital centre E
JCB
Not rated
BRFkredit
General capital centre Grand RO
Withdrawn
DLR Kredit A/S
Baa1
On review for downgrade
Aa1
On review for downgrade
Probable High
0
-
18.2%
-
General capital centre Grand RO
Aa1
On review for downgrade
Probable High
0
-
10.1%
-
LR Realkedit A/S
Not rated
General capital centre Grand/New RO
Not rated
Capital centre B
SDO
Note: CB = covered bond, GRAND RO = Grandfathered RO bonds issued before 2008, New RO = RO bonds issued after 2007, OC = over-collateralisation
Source: Special report: Moody's European covered bonds monitoring overview Q4 2011, rating updates
The TPI is Moody’s assessment of how likely a covered bond is to receive timely
payments following issuer default. The TPI ranges from ‘Probable’ to ‘Very High’ and
determines the maximum number of rating levels by which a covered bond can exceed
the rating of the underlying issuer. Hence, Moody’s covered bond ratings are linked to the
issuer rating through the TPI.
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Timely Payment Indicator (TPI)
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Table 38. Moody's Timely Payment Indicator caps
Issuer ratings
Timely Payment Indicators
Very Improbable
Improbable
Probable
Probable-High
High
Very High
A1
Aaa
Aaa
Aaa
Aaa
Aaa
Aaa
A2
Aa1
Aa1
Aaa
Aaa
Aaa
Aaa
A3
Aa2
Aa2
Aaa
Aaa
Aaa
Aaa
Baa1
Aa3
Aa3
Aa1
Aa1
Aaa
Aaa
Baa2
A1
A1
Aa2
Aa2
Aa1
Aaa
Baa3
A3
A2
A1
Aa3
Aa2
Aa1
Ba1
Baa3
Baa2
Baa1
A3
A2
A1
Ba2
Baa3
Baa2
Baa1
A3
A2
A1
Ba3
Baa3
Baa2
Baa1
A3
A2
A1
B1
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
B2
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
B3
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
Source: Moody’s
TPI Leeway determines how far an issuer’s rating can be downgraded without affecting
the covered bond rating. This measure is important, as ‘the large majority of covered
bond downgrades that Moody’s has carried out have been as a result of downgrades of
the underlying issuer ratings’1.
TPI Leeway
The TPI Leeway is quite high for Nordea Kredit – above 3 - compared with other
European countries. As shown in the chart below only around 12% of the European
covered bonds rated by Moody’s have a TPI Leeway of 4 or above.
Chart 6. Timely Payment Indicator Leeway (Moody's rated covered bonds, Europe)
9%
3%
0 notches
27%
1 notch
2 notches
26%
3 notches
15%
20%
4 notches
5 notches
Source: Moody’s EMEA Covered Bond Monitoring Overview: Q4 2011
The Collateral Score is Moody’s opinion of how much credit enhancement is needed to
protect against the credit deterioration of assets in a Cover Pool in order to reach a
theoretical Aaa based on expected loss, assuming those assets are otherwise unsupported.
The higher the credit quality of the Cover Pool, the lower the Collateral Score.
1
Collateral Score
Moody’s EMEA Covered Bonds: 2011 Outlook & 2010 Review.
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Judged by Moody’s collateral score, the credit quality of Danish cover pools has been
stable or even improved over recent quarters. However, the housing market still seems
fragile and, although the labour market seems to have stabilised, any deterioration in
these markets cannot be ruled out and, as such, the outlook for Danish cover pools seems
clouded. All issuers have increased administration fees (especially against corporate
clients), in order to offset rising loan losses and impairments (this can typically be done
with three months’ notice).
Compared with Nordic peers, the magnitude of corporate lending within cover pools is
much higher and this is the main driver for Danish issuers scoring higher (or worse)
collateral scores.
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5. Bond types
Danish covered bonds are secured by mortgages on real property. Persistent demand in
Denmark for mortgage finance has rendered the Danish bond market the largest in the
world. As of January 2012, the volume of Danish covered bonds (denominated in DKK
and EUR) issued by specialist mortgage banks stood at 2,571bn.
Bonds are issued against mortgages
on real property
Table 39. Volume of Danish bonds (bn)
Government bonds
T-bills
Mortgage bonds
Other
Total
Jan-10
Jan-11
Jan-12
531.7
569.5
613.4
0.0
28.2
46.4
2,396.0
2,468.1
2,571.2
291.0
306.9
255.7
3,218.7
3,372.6
3,486.7
Source: Danmarks Nationalbank
The covered bond market in Denmark has experienced a rapid and profound transition
over the past few years. Traditionally, callable annuity bonds predominated, mirroring the
dominance of callable fixed rate mortgage loans in the Danish property market. Noncallable bullet bonds were introduced to fund interest-reset loans, which were launched in
1996. Since then, a sustained demand for interest-reset loans has shifted the Danish
covered bond market to such an extent that non-callable bullet bonds as at the end of 2011
made up almost 45% of total market volume (see charts below).
Innovation in recent years
Chart 7. Bond type distribution in the Danish covered bond market
Callables
End of 2006
Non-callables DKK
0% 3%
4%
13%
Non-callables EUR
Capped floaters
End of 2011
1% 1%
11%
47%
27%
9%
4%
6%
Floaters
Junior covered bonds
Other
29%
44%
Source: Danske Markets
Floating rate covered bonds (FRNs) with an embedded cap structure have met increasing
demand. As a result, mortgage banks introduced a line of products in 2004 that were
funded by issuing floating-to-fixed covered bonds or capped floaters.
In 2005, FRNs without a cap were introduced, targeting corporate clients, and, in 2007,
FRNs with a ratchet coupon were launched.
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Table 40. Bond structures
Callable annuity bonds
Non-callable bullet bonds
Floating-to-fixed/floaters/capped floaters
Interest payments
Quarterly
Annual
Quarterly
Repayment
Annuity or IO
Bullet
Annuity or IO
Coupon
Fixed
Fixed
Floating, capped
Currency denomination
DKK
DKK or EUR
DKK
Maturities
10-30 years
1-11 years
5-30 years
Issuance
Tap
Tap or auction
Tap
Opening period
3 years
Maturity
3 years or maturity
Note: IO = interest only
Source: Danske Markets
Callable annuity bonds
Callable annuity bonds are unique to the Danish covered bond market. Traditionally,
callable annuity bonds were the only type of bonds issued in the Danish covered bond
market but the introduction of new products has expanded market diversity. Today,
callable bonds remain highly liquid funding instruments.
The largest part of the mortgage
banking market
Originally, this type of bond had two payment dates per year but four has been the norm
since 1985. Standard payment dates are 1 January, 1 April, 1 July and 1 October.
Maturities are primarily 10, 15, 20 or 30 years.
Payment dates and maturities
Callable annuity bonds are fixed rate bonds with an embedded call option. The embedded
call option enables borrowers to prepay their loan at par at each payment date during the
duration of the loan.
Call option
Traditionally, all callable loans were issued as annuity loans (level-pay loans). Annuity
loans amortise with equal payments consisting of principal and interest but the amount of
principal repaid increases over time, while the amount of interest decreases. In 2003,
deregulation enabled mortgage banks to offer borrowers interest-only payments for up to
10 years. Callable annuity loans with an interest-only option are funded in separate
callable bond series (interest-only hybrids).
Payment profile
Borrowers’ interest payments and redemptions made on the payment dates are distributed
to investors in accordance with the percentage of bonds drawn so that any investor’s
holding in a given bond series will correspond to the overall percentage of bonds drawn
in that series. The amount is rounded to the nearest øre (DKK0.01) for bonds
denominated in Danish kroner and euro cents for bonds denominated in euro. The
percentages of bonds drawn are published on the publication date.
Ordinary repayments
There is no direct link between the borrower and the investor in the sense that the investor
does not buy a bond in the name of a specific person or property. The pool of borrowers
in a bond series may consist of both private and corporate borrowers. The repayments at
one payment date are the sum of the redemptions from all borrowers in the pool. Every
month the mortgage banks publish the borrower distribution of each bond series to enable
investors to predict prepayment behaviour.
Pools
Opening period
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Callable bond series are open for issuance for a period of three years2, e.g. between
1 September 2002 and 31 August 2005 all 30-year loans were financed through the
issuance of bonds maturing in 2035 and all 20-year loans by bonds maturing in 2025. On
account of this opening period and the possibility of taking a loan with a shorter maturity
than the bond’s maturity, the actual cash flow on a bond will not be equivalent to the
theoretical cash flow of a callable bond. Hence, the calculation of key figures on bonds
requires information about the actual cash flow. After each payment date, the mortgage
banks supply these figures to the OMX Nordic Exchange.
Mortgage banks have agreed not to offer callable loans based on bonds priced above par,
referred to as the par rule, to avoid arbitrage from borrowers simultaneously disbursing a
loan at a price above par and prepaying the loan at par. The opening period of a bond
series may therefore be shortened if bond prices exceed par but the bond series will be
reopened for issuance if the price falls below par again.
Par rule
The traditional convex relationship between the level of interest rates and the prices of
traditional bonds is not directly applicable to callable bonds. The reason is that a callable
bond can be considered as a portfolio of a non-callable bond and a sold option to repay
the bond at par. As interest rates decline and the price of the bond rises above par, the
value of the option will rise (see the chart below).
Pricing callable bonds
Compared with a non-callable bond, the price is kept down when interest rates decline, as
debtors are likely to start repaying the bond at par. When a bond becomes extremely
exposed to remortgaging, the price will fall when interest rates fall. Conversely, these
bonds may offer a defensive investment alternative for investors who expect increasing
interest rates.
Chart 8. The price of a callable and non-callable bonds
Price
Par
Callable
Non-callable
Yield
Source: Danske Markets
Non-callable bullet bonds
Non-callable bullet bonds are fixed rate bonds with a single annual payment on 1 January,
1 April or 1 October. Maturities range from one to 11 years, with emphasis on the one- to
five-year segment. The characteristics of the bonds mirror those of plain-vanilla Danish
government bonds and most European covered bonds.
Interest-reset loans and non-callable
bullet bonds
2
The opening period can in certain circumstances be shorter or longer than three years, e.g. in
connection with implementation of the new Mortgage Act in July 2007, the 2038 bond series
was closed early and the opening period for the 2041 series was extended to almost four years.
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Non-callable bullet bonds were introduced to fund interest-reset loans – FlexLån® – first
launched by Realkredit Danmark in 1996. Since then, sustained demand for interest-reset
loans has been recorded, leading to a profound transition of the Danish covered bond
market from callable issues to non-callable issues. As at end-June 2010, non-callable
bullet bonds made up almost 50% of total market volume.
The popularity of interest-reset loans is inter alia attributable to the great flexibility they
offer to borrowers. The borrower may choose between more than 20 different interestreset profiles, though all of these are funded by issuing a single range of bonds.
Interest-reset loans are offered as 10-, 15-, 20- or 30-year loans. The borrower can choose
to repay his loan four or 12 times a year. The 1- to 11-year non-callable bullet bonds that
fund the loans have one interest payment a year, on 1 January, 1 April or 1 October. Each
year, when the shortest bond matures, a new 11-year bond is opened.
Payment dates and maturities
As is the case for callable bonds in Denmark, the majority of loans that are interest reset
are repaid in accordance with the annuity principle or annuity with an interest-only
option.
Annuity loans based on bullet bonds
As the bonds funding the loans are bullet bonds, the bonds and loans are balanced once a
year by issuing an amount of bonds required to offset the remaining principle of the
annuity profile of the individual loan.
The chart below illustrates a 30Y annuity loan based on a five-year interest-reset profile.
Chart 9. Funding profile of 30Y annuity loan based on a 5Y interest-reset profile
1,000,000
Loan issue
1. refinance
2. refinance
3. refinance
4. refinance
5. refinance
800,000
600,000
400,000
200,000
0
1 year bond
2 year bond
3 year bond
4 year bond
5 year bond
Source: Danske Markets
Since the launch of FlexLån® in 1996, the most popular profile of the loans has been the
loan funded by the one-year bond. As a result, this bond is by far the most liquid noncallable bond today. Lately, an increase in demand for loans funded by bullet bonds with
longer maturities has been recorded, increasing the volume of bonds with three- and fiveyear maturities substantially.
Increasing issues in interest-reset
loans funded by longer maturities
The payment date of the interest-reset loan has traditionally been 1 January with a
refinancing auction in December. However, in recent years, the outstanding amount for
interest-reset loans has increased quite significantly and hence the auctioned amount at
the December auction. In order to limit the increasing auction size of the December
auction, since 2005 Nykredit has offered borrowers interest-reset loans with payment
dates of 1 April and 1 October and in 2010 Realkredit Danmark, BRFkredit, Nordea
Kredit, DLR and LRF started issuing non-callable bullet interest-reset covered bond
series with payment dates of 1 April or 1 October.
Increasing issues in interest-reset with
payment dates 1 April and 1 October
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The volume of non-callable bullet bonds split by maturity and payment date is indicated
in the charts below.
Chart 10. Volume of DKK non-callables (DKKbn), end-2011
60
January
April
October
50
40
30
20
10
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Danske Markets
Chart 11. Volume of EUR non-callables (EURbn), end-2011
16
January
14
April
October
12
10
8
6
4
2
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Danske Markets
As is the case for all covered bonds in Denmark, there is no separation of the borrowers in
a security code. This means that a borrower can be either a private or a commercial
borrower. However, there are restrictions in Danish legislation as to which maturity and
repayment profiles can be offered in the various segments (see Chapter 2).
Pools
The mortgage banks aim to keep the bond series that funds the interest-reset loans open
throughout their maturity.
Opening period
Non-callable bullet bonds are issued on tap throughout the maturity to match loan
origination.
Refinancing maturing bonds at auction
Bonds maturing on 1 January, 1 April and 1 October are refinanced by new bond issuing
sold at auctions in December, March and September, respectively. Due to the success of
interest-reset loans, the refinancing auctions have grown into one of the most liquidissuing activities in European covered bond markets.
The auctions take place at the OMX Nordic Exchange’s mortgage-issuing sub-market. The
Dutch auction principle and hidden call method are used. Under the Dutch auction principle,
all bids above the cut-off price are settled in full at the cut-off price. For bids at the exact cutoff price, proportional allocation is used. All bids below the cut-off price are not settled.
Hidden call means the bidders can see only their own bids, while the issuer can see all bids.
The total volume of the refinancing auctions is indicated in the chart below.
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Chart 12. Auction volume of non-callable bullet bonds (DKKbn)
600
500
400
DKK
EUR
300
200
100
Dec-12
Sep-12
Mar-12
Dec-11
Sep-11
Mar-11
Dec-10
Sep-10
Mar-10
Dec-09
Sep-09
Mar-09
Dec-08
Sep-08
Mar-08
Dec-07
Sep-07
Mar-07
Dec-06
Sep-06
Mar-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
0
Source: Danske Markets
At the commencement of the euro, the Danish mortgage banks launched a euro
programme to fund EUR-denominated interest-reset loans. The euro programme was
launched on equal terms with DKK-denominated non-callable bullet bonds. Hence, EURdenominated covered bonds are non-callable fixed rate bullets with maturities from one to
11 years and a single annual payment due 1 January, 1 April or 1 October.
Non-callable bullet bonds denominated
in euro
Demand for EUR-denominated interest-reset loans has been driven mainly by the Danish
kroner versus euro yield spread. A sustained yield spread has led to steady growth in the
volume of EUR-denominated bonds issued.
Realkredit Danmark, Nykredit, Nordea Kredit, BRF and DLR have issued EUR-denominated
covered bonds – non-callables and floaters – through a Luxembourg-based central securities
depositary (VP Luxembourg). These bonds have LU isin codes and are ECB eligible.
ECB eligibility
Floating-to-fixed and capped floaters
Floating-to-fixed and capped floaters are a line of floating rate products with embedded
caps applying to the entire maturity of the loans maximised at 30 years. The line of
products is offered both as annuity loans and as annuity loans with a 10-year interest-only
option exercisable during the term of the loan at the borrower’s discretion.
Interest rates are fixed based on the six-month CIBOR plus a fixed margin each 1 April
and 1 October. However, interest payments and redemptions fall due on 1 January,
1 April, 1 July and 1 October.
Two different cap structures are available. Floating-to-fixed is based on a floating-to-fixed
cap structure whereby interest rates will become fixed at the cap rate if the cap is triggered.
In contrast, capped floaters are based on a traditional cap structure where interest rates are
floating for the entire maturity of the loan, albeit maximised at the cap rate.
Two structures
Both types of bonds are open for issuance for three years.
Floating-to-fixed
Floating-to-fixed covered bonds were introduced to fund FlexGaranti®, first launched by
Realkredit Danmark in October 2004.
Introduced October 2004
The floating-to-fixed cap structure implies interest rates become fixed at the cap rate if the cap
is triggered. Prior to the triggering of the cap, loans and bonds are non-callable. However, if
the cap is triggered, loans and bonds become callable for the remaining term to maturity.
Hence, loans and bonds resemble traditional callable fixed rate annuities if the cap is triggered.
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The floating-to-fixed cap structure offers borrowers the possibility of remortgaging once
the embedded cap has been exercised without suffering a capital loss on the loan
becoming callable. Borrower behaviour is thus expected to resemble the behaviour of
borrowers choosing a callable loan. Pricing of the bond is therefore based on similar
methodology to pricing callable bonds.
The floating-to-fixed cap structure is illustrated below.
Chart 13. Floating-to-fixed cap structure, cap rate 6%
6 months CIBOR
Reference rate
Cap
Coupon
8%
7%
6%
5%
4%
3%
2%
1%
0%
2005
2006
2007
2008
2009
2010
Source: Danske Markets
Capped floaters
Capped floaters are based on a traditional cap structure in which interest rates are floating
for the entire term of the bond, although they are maximised at the cap rate.
Capped floaters are callable at 105 for the entire term to maturity. Market pricing of
capped floaters has so far suggested that the call premium will be insignificant due to the
cap structure rendering market prices substantially above par unlikely. The capped
floaters cap structure is illustrated below.
Chart 14. Capped floaters cap structure, cap rate 5%
6 months CIBOR
Reference rate
Cap
Coupon
8%
7%
6%
5%
4%
3%
2%
1%
0%
2005
2006
2007
2008
2009
2010
Source: Danske Markets
Floating-to-fixed and capped floaters are both offered as traditional annuity loans and
annuity loans with a 10-year interest-only option. The opening period for both floating-tofixed and capped floaters follows the same scheme as for callable annuity bonds, i.e. a
three-year opening period.
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RenteDykTM – an adjustable rate loan with a ratchet coupon
In October 2007, Realkredit Danmark launched RenteDykTM, which is an adjustable rate
loan with a ratchet coupon, i.e. a coupon rate that can only fall.
Introduced October 2007
Loans are funded by four different bond series (DKK/EUR, std/io) and the bonds are
issued in accordance with the specific balance principle and have the same characteristics
as the loans that back them (pass-through). The coupon on the DKK-denominated bonds
is fixed every six months (1 April and 1 October) based on a 10Y DKK swap reference
rate plus an interest rate premium of 120bp. The 10Y DKK swap reference rate is
published on a daily basis by Danmarks Nationalbank.
Bond structure
The coupon on the EUR-denominated bonds will also be fixed every six months (1 April
and 1 October) based on the average of a 10Y EUR swap reference rate plus an interest
rate premium of 100bp. The 10Y EUR swap rate is quoted by the International Swaps and
Derivatives Association (ISDA), with Reuters being responsible for calculation and
publication3.
The bonds are callable at a price of 105.
The chart below shows the developments in the 10Y Danish swap rate, the reference rate
(calculated according to the fixing rules) and the coupon rate on the bond. As can be seen
in the figure, the 10Y swap rate in DKK has fallen over the period. Further, during
periods of rising interest rates, the coupon is locked at a low level.
Historical developments
Chart 15. Ratchet coupon structure
10Y Swap
Reference rate
Coupon
7%
6%
5%
4%
3%
2%
1%
0%
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Source: Danske Markets
Floating rate /FRNs
In recent years, we have seen increasing issuance in floating rate covered bonds (FRNs).
The outstanding amount in floating rate notes amounted to 11% as at the end of 2011 (see
chart below) compared with 4% at the end of 2006. The floating rate mortgage loan was
intended for the corporate market.
Floating-rate loans intended for the
corporate market
The Danish floating rate covered bond market is very diversified and the bonds have a range
of different characteristics (see table below). The majority of the floating rate bonds are
denominated in DKK or EUR with interest rate fixing against 3M EURIBOR and 3M/6M
CIBOR, respectively. However, some bonds – issued by Nykredit – are denominated in
EUR with interest rate fixing against WIBOR or SEK with fixing against STIBOR.
Bond structure
3
ISDA fixing on the 10Y EUR swap rate used (EURIBOR BASIS – EUR), published 10:00
London time (Reuters ISDAFIX2 and Bloomberg EIISDA10 Index).
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Table 41. Characteristics of floating rate notes (FRNs)
Currency
DKK or EUR
Fixing rate
3M EURIBOR or 3M/6M CIBOR
(plus potential interest rate spread)
Cash flow profile
Annuity or bullet
Bond type
RO (20% risk weight), grandfathered RO or SDO/SDRO
Number of terms
2 or 4 terms per year
Interest rate fixing
1. Jan/1. Jul or 1. Jan/1. Apr/1. Jul/1. Oct
Fixing date
3rd, 4th, 5th or 6th last banking day or Jun/Dec or Mar/Jun/Sep/Dec
Callable?
Callable or non-callable
Coupon multiplicator factor
ACT/360 or ACT/ACT
Source: Danske Markets
A coupon multiplicator is used for some bonds when calculating the coupon rate at the
time of fixing. For example, if a bond has a coupon multiplicator factor of ACT/360 and
the fixing is based on 6M CIBOR, the coupon rate coupon is equal to 6M CIBOR
multiplied by 365/360. The 365/360 multiplication is to neutralise the differences
occurring from deviations in the interest rate conventions in the money market and the
bond market, thus making the product suitable for derivatives solutions.
Coupon multiplicator factor
Some floating rate notes issued by Nykredit, DLR and Nordea Kredit are callable at par.
Floating rate notes issued by Realkredit Danmark are all non-callable.
Some FRNs are callable at par
The majority of the floating rate bonds are issued as SDO/SDRO bonds. However, some
bonds were issued as RO before the implementation of the new Mortgage Act in 2007
and these bonds are grandfathered. There are also new bonds that are issued as RO under
the new Mortgage Act. These bonds have a risk weight of 20%.
RO and SDRO/SDO
Floating rate loans are offered as both annuity loans and bullet loans and the maximum
maturity is 35 years. The majority of the floating rate notes are issued in the 0-5 year
segment and the 10- and 30-year segment (see chart below).
Maximum maturity of 35 years
Chart 16. Outstanding amount on FRNs (bn)
10
DKK
8
EUR
6
4
2
Oct-41
Oct-39
Oct-38
Oct-24
Jan-38
Oct-19
Apr-20
Jul-18
Jan-19
Jan-18
Oct-16
Jan-17
Jan-14
Apr-14
Jul-13
Oct-13
Jan-13
Apr-13
Jul-12
Oct-12
Jan-12
Jan-12
Jul-11
Oct-11
0
Source: Danske Markets
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Junior covered bonds (Section 33 e senior debt)
Junior covered bond (JCB) is a bond type introduced into the Danish bond market in
connection with the new Mortgage Act in July 2007. Mortgage banks may issue senior debt
in order to raise supplementary capital. The proceeds from the issuance of senior debt have
to be invested in assets, such as government bonds, which are placed in the cover pool4.
Introduced in 2007
Senior debt is secured in the cover pool but is subordinated to SDOs/SDROs. Hence,
senior debt does not have the same level of security as ordinary covered bonds and
SDOs/SDROs. In the event of bankruptcy, investors in senior debt do not get their money
back until investors in SDOs/SDROs have received theirs. Hence, junior covered bonds
are not gilt-edged (‘guldrandet’) and do not fulfil UCITS.
Secured in the cover pool
Nykredit and BRF were the only issuers of junior covered bonds until March 2012 when
Realkredit Danmark announced that it had decided to issue junior covered bonds.
Realkredit Danmark has issued three fixed rate and three floaters junior covered bonds
out of Capital Centres S and T. See the table below.
Realkredit Danmark, Nykredit and BRF
have issued JCBs
Table 42. Junior covered bonds issued as of end of April 2012
Volume
ISIN
Bond
Ccy
Issue date
DK0009370967
(EURm)
Var. BRFkredit 322.JCBE 2012
DKK
29-Jun-09
201
DK0009373631
3,12 BRFkredit 322.JCBE 2013
DKK
29-Mar-10
134
DK0009375172
Var. BRFkredit 322.JCBE 2014
DKK
05-Jul-11
134
DK0009377111
2,69 BRFkredit 322.JCBE 2014
DKK
09-Feb-12
99
DK0009377384
Var. BRFkredit 322.JCBE ap 2014
DKK
09-Feb-12
226
DK0009377038
Var. BRFkredit 322.JCBE 2015
DKK
06-Feb-12
134
DK0009374522
Var. BRFkredit 322.JCBE 2016
DKK
25-Mar-11
134
DK0009787798
1,75 Nykredit H B ok ncJCB 2012
DKK
13-Jan-12
604
LU0683852882
Nykredit Var HF3B nc lu JCB 2011
EUR
27-Sep-11
200
DK0009781676
Nykredit Var EF6BncJCB 2013
DKK
06-Dec-10
268
DK0009779779
Nykredit Var EF3BncJCB 2013
DKK
07-Jul-10
312
DK0009786477
Nykredit Var HF3BncJCB 2013
DKK
06-Oct-11
470
DK0009780355
Nykredit Var EF3BncJCB 2014
DKK
20-Sep-10
268
LU0547790971
2,65 Nykredit lu EUR 1/4-2014
EUR
08-Oct-10
500
DK0009781403
2,875 Nykredit E B ok ncJCB 2014
DKK
25-Nov-10
604
DK0009774705
4,74 Nykredit JCB 2015
DKK
01-May-09
312
DK0009787954
Nykredit Var HF3BncJCB 2015
DKK
15-Mar-12
336
DK0009788176
2,75 Nykredit H B ok nc JCB 2015
DKK
28-Mar-12
67
DK0009778375
Nykredit Var EF6BncJCB 2016
DKK
27-May-10
940
DK0009788259
3,375 Nykredit H B ap nc JCB 2017
DKK
28-Mar-12
67
DK0009288797
1,875 RD S SrFix apr 2014
DKK
28-Mar-12
537
DK0009288870
2,75 RD T SrFix okt 2015
DKK
28-Mar-12
201
DK0009288953
3,375 RD T SrFix apr 2017
DKK
28-Mar-12
403
DK0009289092
RD Var. RDSRV14T 2014
DKK
12-Apr-12
134
DK0009289332
RD Var. RDSRV15T 2015
DKK
24-Apr-12
228
DK0009289415
RD Var. RDSRV17T 2017
DKK
24-Apr-12
134
Source: Danske Markets
Senior debt from a mortgage bank can be compared with traditional senior debt from a
bank but there are a number of differences.
4
Senior debt from a mortgage bank is
different from senior debt from a bank
There are limits on which assets the institution can place in the cover pool.
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The proceeds from traditional senior debt from a bank are not placed in the cover pool,
even though the bank is permitted to issue SDOs. The bank must, however, just like the
mortgage bank, top up with supplementary collateral if the value of the assets in the cover
pool does not match the value of the SDOs issued.
Hence, traditional bank debt has no ‘direct link’ to the cover pool and does not
necessarily have to be used to buy assets that can serve as supplementary collateral. There
is also a difference in the event of bankruptcy, as investors in traditional bank debt get
their money back once the assets of the bankrupt estate have been added up and it can
often take several years to settle an estate.
Direct link to the cover pool
In the table below, we list some of the features that characterise SDO/SDRO and senior
debt from a mortgage bank and traditional senior debt from a bank.
Table 43. Characteristics of SDO/SDRO bonds and senior debt
SDO/SDRO
Senior debt (mortgage)
Senior debt (bank)
Gilt-edged
Yes
No
No
UCITS
Yes
No
No
BIS capital weight
10% or lower
20%
20%
Proceeds from issuance
Funding of home loans
Purchase of assets
No specific requirements regarding
use of proceeds
Security in case of bankruptcy Security in cover pool
Security in cover pool but subordinate Subordinate to, e.g., all depositors.
to, e.g., SDO/SDRO investors
Payout in case of bankruptcy
No acceleration of cover pool After SDO/SDRO investors, if there is Immediately after bankruptcy, if there
money in cover pool
is money in the estate
Source: Danske Markets
Other products
Index-linked bonds have two annual payment dates and run for up to 50 years after being
issued. Today, this type of bond is used mainly for funding subsidised or agricultural
property. The loans are non-callable annuity, bullet or serial loans. Indexation is
principally based on the net retail price index.
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6. Prepayment
Borrowers raising a callable mortgage loan are entitled to prepay the mortgage at par
prior to maturity. Basically, a borrower’s right to prepay is embedded in one or two
prepayment options.

Callable loans have an embedded call option and a delivery option.

Non-callable loans have an embedded delivery option only.
To comply with the specific balance principle described in Chapter 2, the borrower’s call
option must be embedded in issued covered bonds in order to achieve a perfect hedge, i.e.
the mortgage banks do not suffer a loss when call options are exercised. The delivery
option is embedded in all loans originated by Danish mortgage banks. It should be
stressed that a loan does not necessarily have to be terminated or prepaid when a property
changes hands. Accordingly, when a property is sold, the mortgage bank decides whether
or not the new owner can take over the loan.
How to refinance a mortgage
If a borrower wants to exercise the call option and prepay a loan at par, he may choose
between immediate prepayment and prepayment on the payment date. The former is the
most common choice. Borrowers must give two months’ notice before exercising the call
option, i.e. notification dates are 31 January, 30 April, 31 July and 30 October.
Using the call option
About 40 days prior to the payment date, accurate information on the prepayment
volumes for the individual bond series is available on the publication date. Extraordinary
prepayments are distributed among investors according to the same principle of drawing
as described above for ordinary repayments (see Chapter 5).
Chart 17. Important dates for mortgage bond refinancing
Payment
Oct 2009
Notification
for October
Oct , 1
Jul , 31
Aug , 21
Publication
for October
Payment
Jan 2010
Notification
for January
Oct , 31
Jan , 1
Nov , 20
Publication
for January
Payment
Apr 2010
Notification
for April
Payment
Jul 2010
Notification
for July
Jan , 31
Apr , 1 Apr , 30 Jul , 1
May , 21
Feb , 19
Publication
for April
Publication
for July
Source: Danske Markets
Immediate prepayment means that the remaining debt and interest payments are payable
to the mortgage bank within three days: i.e. prior to the payment date. However, as
investors are still entitled to their coupon payments, the borrower will still have to pay the
coupon until the payment date (1 January, 1 April, 1 July and 1 October), which, in
principle, is the first date on which the loan may be prepaid.
Immediate prepayment
Thus, the borrower prepays the remaining principal plus the coupon payment for the
period until the payment date. The borrower is compensated for making the funds
available to the mortgage bank until the payment date (see chart below). This
compensation is normally calculated at a rate close to the current money market rate.
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Chart 18. Notification and payments in connection with extraordinary prepayment
Prepayment and notification
Bond redemption
Coupon rate charged and deposit rate received
31 January
Notification
1 April
30 April
Payment Notification
1 July
Payment
Source: Danske Markets
Prepayment on the payment date means that the borrower does not have to prepay the
remaining principal and the coupon due until the payment date.
When a borrower prepays a loan, he usually raises a new one. This involves two separate
transactions and the borrower is therefore free to raise a mortgage loan with a different
mortgage bank than the one with which the repaid loan was raised.
When a borrower exercises the delivery option, the underlying bonds are purchased at
market price. By delivering the bonds to the mortgage bank, the loan is – fully or partially
– redeemed. It is the borrower who runs the hypothetical risk of not being able to buy the
bond due to lock-in effects and the mortgage banks suffer no loss when the option is
exercised.
Using the delivery option
Borrowers will exercise the delivery option only if the bond price is below par and will be
charged a trading fee typically of 0.15-0.25%.
Observed prepayment rates are indicated in the chart below and include both delivery and
call option prepayments. As can be seen, observed prepayments are closely correlated to a
decline in long-term interest rates, suggesting that remortgaging to a lower interest rate is
the main reason for prepayment.
Observed prepayment rates
Chart 19. Correlation between long-term interest rates and prepayments
Prepayments, DKK bn
10Y swap rate (rhs)
140
7%
120
6%
100
5%
80
4%
60
3%
40
2%
20
1%
0
2000
2002
2004
2006
2008
2010
0%
2012
Source: Danske Markets
Calculating prepayment gains
Most Danish mortgage loans are prepaid in connection with remortgaging (debt
management) or in connection with the sale of a house (though prepayment is not
compulsory, as the loan may be taken over by the new owner).
The advisory services provided by banks and mortgage banks focus on the gain on the
first year’s net payments and on the net present value of the old loan and the new loan
alternative.
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Today, borrowers focus primarily on liquidity savings in the form of lower net payments
and their required gains are therefore measured mainly in terms of the difference between
the first year’s net payments on the existing loan and the new loan. In some cases, the
first year’s net payments are reduced but the gain measured in terms of the net present
value of future payments is negative. This would typically be the case if the borrower
chose to raise a loan with a longer term to maturity than the old loan. Under such
circumstances, some borrowers will want to refinance, while others prefer to wait until
the net present value gain is positive and above a threshold level.
The second parameter in the advisory service is the difference in net present values, also
called the prepayment gain.
Gain on first year’s net payment
Gain on difference in net present values
The calculation of the prepayment gain is very sensitive to the yield curve applied. In
practice, a flat yield curve corresponding to the after-tax yield on the refinancing
alternative is often applied. The prepayment gain can be calculated on the basis of the
following formula.
.
·
NPV(old loan) is the net present value of the old loan, corresponding to the remaining
after-tax payments discounted at the after-tax yield of the new refinancing alternative.
The rem. debt is the remaining debt to be refinanced and costs are the refinancing costs.
Disc is the discounting factor from the payment date to the actual date on which the
borrower decides to prepay the loan (no later than the notification date).
The borrower will most often be advised to refinance the mortgage on the basis of a
financial gain calculated in percent (as shown above) but also in absolute value.
Different types of remortgaging strategies
Borrowers have gradually become more conscious of managing their debt and
increasingly use different remortgaging strategies to optimise their home financing.
Prepayment
Their choice of remortgaging strategy is heavily dependent on interest rate movements
since the existing loan was raised and, in certain cases, also the borrower’s expectations
with regard to future changes in interest rates. Set out below is a brief description of the
most commonly used remortgaging strategies.
Following substantial drops in interest rates, borrowers will benefit from remortgaging an
existing loan to a new loan with a lower nominal rate of interest, as described above. The
borrower will receive a gain in the form of lower future net payments and thus lower firstyear net payments due to the lower interest rate. However, this type of remortgaging
typically results in an increase of the outstanding debt, depending on the price of the
bonds underlying the new loan.
Following substantial increases in long-term interest rates, the borrower is able to reduce
the outstanding debt by redeeming the old loan at a low market price and refinancing it
through new bonds at a higher coupon than that of the original loan. However, this type of
remortgaging will lead to rising future payments because of the higher interest payments.
Such remortgaging is therefore only profitable if the interest rates decline again within a
short time period. Borrowers initially achieve a reduction of their outstanding debt at the
expense of higher payments, which they hope to be able to reduce by remortgaging to a
lower coupon at a later date.
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Remortgaging to a higher coupon
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The introduction of interest-reset loans (see Chapter 5) formed the basis of a new type of
remortgaging strategy. In periods of rising long-term interest rates and a substantial
steepening of the yield curve and in periods of plunging short-term interest rates,
borrowers holding a loan funded by long-term fixed rate bonds may remortgage their
loans by redeeming the loan and refinancing it by raising a loan based on short-term
bonds. The gain achieved from adopting this strategy is a reduction in the outstanding
debt and lower future mortgage payments, assuming that future short-term refinancing
rates remain low. In the opposite case, where long-term interest rates have plummeted
and short-term interest rates are higher than the long-term interest rates, the borrower will
be able to reduce his mortgage payments by remortgaging from an interest-reset loan
based on short-term bonds to a fixed interest rate loan based on long-term bonds.
Remortgaging to interest-reset
mortgages
Following the introduction of interest-reset loans, borrowers have greater opportunities
for achieving future remortgaging gains because redemption of the existing loan and
disbursement of the new loan may take place at interest rates across the yield curve.
Remortgage gain depends on several factors
The remortgaging gain generally depends on several debtor-specific factors. Hence, it is
of significance whether the borrower is a private individual or a corporate borrower,
because the tax deduction rate for interest paid by the borrower varies. However, in recent
years, the tax deduction rate for private borrowers has been gradually reduced and the
difference in the tax deduction rate between private borrowers and corporate borrowers
will be reduced markedly in the coming years.
Prepayment gain depends on the
borrower and size of the remaining
principal
In ‘The Whitsun Package’, which was part of the 1998 tax reform, the tax deduction rate
for private individuals was reduced from an average of 46% to 33% and in the most
recent tax reform ‘Forårspakken 2.0’ from February 2009 the tax deduction rate was
reduced yet again from 33% to 25% over a transitional period from 2012 to 2019. The
deductible rate for businesses has also been reduced over recent years and stands at 25%
today compared with 34% in 1998.
Moreover, the size of the remaining principal will typically determine the remortgaging
gain. If the remaining principal is small, the refinancing costs in the form of a fixed fee
will weigh more. The gain will therefore be relatively smaller than for a large remaining
principal.
Finally, the remortgaging gain may depend on the term to maturity. Hence, the achieved
gain is typically greater when refinancing a 30-year loan than when financing a shorter
term loan.
In recent years, greater attention in the media and campaigns launched by the mortgage
banks have resulted in borrowers responding more quickly to the opportunities for a
remortgaging gain.
Refinancing campaigns by mortgage
banks
Advisory services have also become more sophisticated and borrowers are able to have
their refinancing opportunities monitored, meaning that they are contacted when the
remortgaging gain exceeds a pre-agreed level.
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7. Estimating prepayments
Estimating prepayments is essential to the pricing of callable covered bonds — not just
for the coming payment date but for all future payment dates. Prepayments are important
to investors as they affect cash flows. As a result, the duration of bonds will be affected,
so investors cannot be sure about the portfolio risk (see also Chapter 9).
This chapter describes how to estimate prepayments.
Data for estimating prepayments
One of the most important factors affecting a borrower’s prepayment decision is the gain
from refinancing as described in Chapter 6.
Prepayment gain
Historical prepayment rates for each series give a first impression of the remortgaging
sensitivity of a bond series. Traditionally, series that have experienced significant
prepayments can be characterised as ‘having lost their prepayment potential’ as the
remaining borrowers have presumably been able to realise decent refinancing gains at an
earlier date. However, we increasingly see so-called burned-out series continuing to
experience high prepayment rates.
Historical prepayment rates
The debtor distribution of a bond series is a breakdown of the total underlying remaining
debt. A debtor distribution table breaks down loans into five groups according to the size
of the remaining debt in million DKK, the share of cash and bond loans and the share of
corporate and private loans. This type of distribution makes it possible to divide
borrowers into 20 debtor groups.
Debtor distributions
Chart 20. Debtor distribution – RD
4'41 loan size
0-0.2
mill.
0%
>3
mill.
33%
0.2-0.5
mill.
3%
Corp.
36%
0.5-1
mill.
16%
1-3
mill.
48%
Source: Danske Markets
Chart 21. Debtor distribution - RD
4'41 corporate vs private
Private
64%
Source: Danske Markets
Large corporate loans are generally assumed to have a higher remortgaging rate than
small private loans, because these loans, due to the higher remaining principal, have a
lower percentage cost when prepaying. The size of the remaining principal is important
due to both its relation to fixed remortgaging costs and the psychological factor that
makes a gain of DKK100,000 more tempting than a gain of DKK1,000.
Corporate versus private loans
Every week, the individual mortgage banks publish preliminary prepayments for each
series for future, non-published payment dates. These prepayments allow for an
estimation of the volume of prepayments for the next payment date (comparison with
previous payment dates). They also allow for a calculation of the share of total
prepayments for a given announced preliminary prepayment by using prepayment data at
the same time prior to the previous payment date.
Preliminary prepayments
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Typically, preliminary prepayments are characterised by a strong exponential increase up
to expiry of the notification period. Any expectation based on announced prepayments
therefore becomes more reliable as the expiry of the notification period approaches. One
may also track any differences between the institutions up to the notification date.
Preliminary prepayment rate
Chart 22. Development in preliminary prepayment rates – RD 5'41
10%
Jan-12
Oct-11
Jul-11
Apr-11
8%
6%
4%
2%
0%
20
19
18
17
16
15
14
13
12
11
10
9
8
Number of weeks before term
Source: Danske Markets
Models for estimating prepayments
There are several different models for estimating prepayments; one of the most
commonly used being the so-called capital gain requirement model. This model assumes
that a given debtor will refinance his loan if the obtainable remortgaging gain is greater
than his debtor-specific required gain. Furthermore, the model allows for different debtor
patterns by assuming that the various groups in the debtor distribution behave differently
when it comes to borrowers’ inclination to refinance at various rates.
Capital gain requirement models
The relationship between prepayment gains and prepayments is often described using a
normal distribution function. The mean value indicates how large the modelled
prepayment gain must be if the series has a prepayment rate of 50%. On the basis of a
stochastic model of the yield curve, it is possible to calculate prepayment gains (for each
debtor group) for the entire term of the bond in different interest rate scenarios.
Chart 23. Normal distribution of estimated prepayments
Estimated Prepayment Rate
100%
80%
60%
40%
20%
0%
0%
5%
10%
15%
20%
25%
30%
35%
Prepayment Gain
Source: Danske Markets
A number of the major banks in Denmark have proprietary covered bond models. The
one developed by Danske Bank is based on a capital gain requirement model and a
Gaussian term structure model of interests and is available through Danske Analytics.
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A covered bond model
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The required gain model uses the refinancing gain, the pool factor5 and the time to
maturity of the existing loan as explanatory variables. The refinancing gain is the NPV
gain the borrower can achieve by refinancing to a loan with the same time to maturity as
the existing loan. The refinancing rate is assumed to be equal to the swap rate for the
given time to maturity plus a debtor spread.
Required gain model
A debtor spread is added as the model is estimated using historical data. An extraordinary
widening of spreads between mortgage bonds and swaps can cause inconsistencies
between the assumed refinancing rate and the actual refinancing rate if no correction
using the debtor spread is made. The debtor spread is estimated as the extraordinary
spread between the mortgage bonds and swaps. Debtors are split into three groups –
debtors with small loans, debtors with medium-sized loans and debtors with large loans.
This should provide sufficient homogeneous behaviour in each group to use the same
prepayment function for all debtors in the group.
The term structure model of interest rates is a Gaussian Hull & White model. It is
calibrated to the DKK swap curve and swaption volatilities. The calibration to swaption
volatilities incorporates the entire range of at-the-money swaptions (80 swaptions). All of
this market data is based on quotes from Danske Markets.
Term structure model of interest rates
Because of the path dependency brought into the model by the pool factor, Danske Bank
uses Monte Carlo simulation to price Danish covered bonds and calculate bond key figures.
Monte Carlo simulations
Thorough implementation of Monte Carlo simulation ensures that the dynamics and
market information from the calibrated term structure model are fully reflected in the
pricing of Danish covered bonds and the calculation of bond key figures.
It should be noted that Monte Carlo simulation – with a finite number of paths – gives
only an estimate of the calibrated model’s correct prices and key figures. The error on
these Monte Carlo estimates can be measured by the standard deviation on the price and
key figure estimates.
In principle, the standard deviation can be reduced to zero by having an infinite number
of paths; however, this is not practicable. Danske Analytics therefore uses two variancereducing techniques – antithetic variables and a control-variate technique. Moreover, the
model uses a different number of paths for different bonds; it will typically use between
200 and 800 Monte Carlo simulations per bond. Bonds whose prices are near par require
the most Monte Carlo simulations as the embedded option here is at-the-money.
The main features of the model are that it is transparent for users and that all its elements are
handled in a consistent manner. One of the reasons for Danske Analytics’ transparency is
that it uses a universal prepayment model without compromising its ability to explain
observed prepayment behaviour. Capped floaters and floating-to-fixed are, however, priced
using special models to comply with the special characteristics of these bond types.
Main features
The model is used every day to produce a number of key figures for Danish callable
bonds. Risk measures such as BPV, duration, convexity and vector key figures are all
calculated on the DKK swap curve parallel-shifted with the swap OAS for each bond.
This partly adjusts for any discrepancies between model and market prices.
The model also handles key figures and holding period returns under assumptions about
future yield curves. These calculations take extraordinary redemptions for intermediate
payment dates into consideration and hence ensure that the pool factor and the relative
weights of the three borrower groups are adjusted appropriately.
5
Outstanding mortgage pool principal as percentage of the original principal balance
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8. Portfolio composition
The largest resident investor group in Danish covered bonds is financial institutions,
holding 52% of the total volume of covered bonds. The second-largest domestic investor
group in the Danish covered bond market is life insurance companies and pension funds,
which hold 21% of the total volume.
The Danish covered bond market also attracts a great number of foreign investors. Based on
statistics from January 2012, foreigners own a nominal DKK381bn (EUR51bn) worth of
Danish covered bonds, equivalent to 15% of the total volume of Danish covered bonds. For
comparison purposes, foreigners’ holdings of government bonds at the time amounted to a
nominal DKK212bn (EUR28bn), or 29% of the total volume of Danish government bonds.
Danish covered bond market in general
Chart 24. Investors in Danish covered bond market, January 2012
14.5%
5.1%
Non-financial corporations
0.7%
3.9%
3.3%
Financial institutions
Life insurance/Pension funds
General government
Households
20.6%
Unallocated domestic
51.9%
Foreigners
Source: Danmarks Nationalbank
Life insurance companies and pension funds are characterised by their long-term
investment horizon. The greater part of this sector’s total bond holdings consists of
Danish covered bonds. The holdings of banks and mortgage banks are also concentrated
in Danish covered bonds and amount to a nominal DKK1,363bn (EUR183bn). This
investor group is characterised by a relatively short-term investment horizon.
Traditionally, foreign investors have been big players in the Danish government bond
market but over the past 10 years they have also shown an increased interest in Danish
covered bonds. In January 2012, government bonds accounted for 32% of their holdings
of Danish bonds, while covered bonds accounted for 58%.
Chart 25. Foreign holdings of Danish bonds
Other bonds
Covered bonds
T-bills
Government bonds
100%
80%
60%
40%
20%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Danmarks Nationalbank
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Bond-specific portfolio shares
Foreign investors have in recent years shown a particular interest in the EURdenominated one-year non-callable covered bond series, e.g. EUR 2’13/4’13 (Jan). As of
January 2012, foreign investors held EUR93bn or 80% of the total outstanding amount in
RTL EUR 2’13/4’13 (Jan). Non-callable covered bonds are characterised by being highly
liquid.
Foreign investor areas of interest
Foreign investors also have significant holdings of the 30Y 4% and 5% callables, where
they hold between 11% and 15% of the total outstanding amount (see table below).
Table 44. Investor breakdown January 2012 (bn)*
DKK 2'13 (Jan)
EUR 2'13/4'13 (Jan)
4'38/4'38io
4'41/4'41io
4'44/4'44io
5'38/5'38io
5'41/5'41io
238
19
44
94
23
70
56
49
75
8
14
4
9
10
Domestic
Foreign
Total
Foreign holding
286
93
52
109
27
79
66
16.9%
80.2%
14.7%
13.3%
15.4%
11.9%
14.9%
* The table shows the aggregated volumes for the most liquid bonds issued by Realkredit Danmark, Nykredit, Nordea Kredit and BRFkredit
Source: Danmarks Nationalbank
In the 30-year segment, the holdings of life-insurance companies and pension funds are
concentrated in Danish covered bonds such as 4% 2038 and 2041. Financial institutions
focus on the non-callable series with short maturities, as these are used for money-market
transactions.
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Resident investors
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9. Performance
Danish covered bonds have traditionally provided a yield pickup compared with, for
example, Danish swaps or government bonds. This yield difference is estimated by the
option-adjusted spread to the swap curve (or the government curve). Moreover, general
risk measures such as the Macaulay duration do not apply to callable mortgage bonds but
instead the duration can be described using option-adjusted duration or OA-BPV.
The OAS specifies the additional yield compared with the Danish swap curve at which
each covered bond trades adjusted for estimated prepayments. The OAS is an indicator of
the additional yield that can be obtained by holding the callable covered bond and reflects
the prepayment and credit risks as well as liquidity considerations. A widening OAS
indicates that the bond has become cheaper relative to swaps and vice versa. Note that the
OAS depends on the model used for forecasting future prepayments.
Option adjusted spread (OAS)
The ASW specifies the spread against 6M CIBOR for the non-callable bullet covered bonds
and the capped floaters. The ASW for the capped floaters is calculated under the assumption
that the cash flow of the capped floaters can be hedged using an amortising cap.
Asset swap spread (ASW)
Danish mortgage bonds OAS/ASW
Chart 26. Danish covered bonds OAS/ASW
150
5% 2038 (callable)
10Y Capped floater
4% 2038 (callable)
10Y Non-callable
30Y Capped floater
1Y Non-callable
100
50
0
-50
-100
-150
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Source: Danske Markets
The spreads (OAS and ASW) for the Danish covered bonds experienced a quite significant
widening in autumn 2008 due to the increased risk aversion in the market and have not been
affected by the escalation of the EU debt crisis. However, compared with other European
covered bonds, the spread widening in Denmark was moderate (see the chart below).
Historical development in spreads
Chart 27. Covered bond ASW spreads (bp, mid)
600
DM DKK Denmark
DM SEK Sweden
iBoxx EUR France
iBoxx EUR UK
iBoxx EUR Ireland
iBoxx EUR Spain
iBoxx EUR Germany
500
400
300
200
100
0
-100
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Source: Danske Markets
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Cross-currency swapped ASW spread
The ASW 3M spread for Danish covered bonds is generally lower than for European
peers. If we for example look at the ASW 3M CIBOR spread for a non-callable RD 2%
Apr-15 and compare the ASW 3M EURIBOR spreads for EURHYP 3.25% Oct-15,BNP
2.5% Jan-15 and the ASW 3M STIBOR spread for SPNTAB 3.75% Mar-15, the German
and Swedish spreads are generally higher than the Danish covered bond (see the chart
below). Hence, looking at the local ASW spreads, Danish covered bonds often seem quite
expensive compared with other European covered bonds.
Chart 28. Local ASW 3M spread for European covered bonds
160
140
120
100
RD 2% Apr-15
SPNTAB 3.75% Mar-15
EURHYP 3.25% Oct-15
BNPPCB 2.5% Jun-15
80
60
40
20
0
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Source: Danske Markets
However, looking at the cross-currency swapped ASW spread where the ASW spread is
swapped into 3M EURIBOR, the spreads of the Danish covered bonds are priced more in
line with European peers (see the chart below) and at a higher spread compared with the
ASW spread 3M EURIBOR levels for Swedish covered bonds.
Chart 29. Cross-currency swapped ASW 3M EURIBOR
160
RD 2% Apr-15
SPNTAB 3.75% Mar-15
EURHYP 3.25% Oct-15
BNPPCB 2.5% Jun-15
140
120
100
80
60
40
20
0
-20
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Source: Danske Markets
Risk
As suggested by the name, option-adjusted BPV (OA-BPV) adjusts for the embedded
option when calculating the interest rate risk of the callable covered bonds. The OA-BPV
may thus be negative for bonds far above par. This is the case when the effect of
prepayments being influenced by interest rate changes is greater than the mere
discounting effect. This means the price may fall even though interest rates are falling.
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Option-adjusted risk measures
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The charts below show the BPV for DGB 5% 2013, DGB 4% 2015 and DGB 4% 2017,
OA-BPV for the two callables 4% RD 2038 and 5% RD 2038 and OA-BPV for capped
floater CF 5% RD 2028. The OA-BPV for 5% RD 2038 has decreased in the last months
because the price is above par and the bond therefore has a higher prepayment risk. The
OA-BPV for 4% RD 2038 has been closer to the trends observed in the BPV for DGB 4%
2017, as the price of this bond is below par and therefore only includes a small option
factor.
BPV for DGB 5% 2013, DGB 4%
2015 and DGB 4% 2017 and OA-BPV
for 4% 2038, 5% 2038 and CF 5%
2038
Chart 30. BPV for Danish covered bonds and Danish government bonds
RD 5'38
DGB 5'13
8
RD 4'38
DGB 4'15
RD CF 5'38
DGB 4'17
6
4
2
0
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Source: Danske Markets
Historical returns
The table below illustrates developments in the annual return on the 30-year covered bond
benchmark index and the 10-year government benchmark index since 2002. As the table
shows, 30-year Danish covered bonds in general outperform 10-year government bonds.
However, in 2004, 2005 and later on in 2010 and 2011 we see the 10-year government
benchmark outperform the 30-year covered bond benchmark. This is a consequence of
the 30-year covered bond benchmark simply having lower duration compared with the
10-year government benchmark over this period. Combined with an environment of
decreasing interest rates, it led to a larger capital gain for the 10-year government
benchmark.
During the financial crisis in 2008, the Danish covered bond underperforms against the
10-year government bond again. This time the underperformance is due to falling interest
rates, increasing volatility and significant spread (OAS) widening. However, the negative
performance in 2008 is followed by a very high positive performance in 2009 as the
market turmoil eases and the spread tightens.
Table 45. Covered bond performance vs government performance
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
30Y covered bond
14.0%
5.7%
10.4%
6.3%
-2.3%
2.1%
7.4%
6.3%
7.07%
11.32%
10Y government
11.3%
4.4%
12.0%
8.3%
-3.7%
1.6%
11.1%
1.9%
8.01%
15.56%
2.6%
1.3%
-1.6%
-2.0%
1.4%
0.4%
-3.7%
4.4%
-0.94%
-4.24%
Excess return
Source: Danske Markets
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Returns on the Danish and euro bond markets
The chart below illustrates returns on various European asset types measured against the
standard deviation of the return. The asset types include the following indices: EUR
government bonds (EFFAS EUR government 5-7 years), Pfandbriefe (Iboxx 5-7 years),
Danish government bonds (EFFAS DKK government 5-7 years), Danish covered bonds
(Nykredit Danish mortgage bond index) and EUR AA-corporates (Iboxx 5-7 years). The
listed returns are calculated as average annual returns for the period from the end of 2001
to the end of 2011. Within this time span, Danish covered bonds have offered the least
volatility and the highest return.
Chart 31. Historical return on Danish and EUR bonds from Dec. 2001 to Dec. 2011
Average annual return
6.2%
Pfandbriefe
6.0%
5.8%
EUR Govt.
Danish covered
bonds
5.6%
DKK govt.
5.4%
EUR AA
Corporates
5.2%
5.0%
2.8%
Standard deviation
3.0%
3.2%
3.4%
3.6%
3.8%
Source: EFFAS, iBoxx, Danske Markets
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10. Danske Markets’ Bond Indices
On 1 January 2008 Danske Markets launched a new universe of bond indices. Danske
Markets offers traditional market indices and constant maturity (CM) indices as well as
the option to customise a benchmark index.
Danske Markets’ market indices are based on the market value weights of a broad
selection of bonds in the Danish bond market, which is divided into five market
segments: four market segments describing the Danish covered bond market – callables,
non-callables, capped floaters and floaters – and a market segment covering government
bonds. The bonds included in the market segments are selected on the basis of a simple
liquidity requirement of an outstanding amount of at least DKK2bn in the individual bond
series. The series are identified by their outstanding amounts on the first trading day of
each month when the market indices are rebalanced. Accordingly, no bonds are selected
or deselected for the market indices based on a special grouping of the bonds or any other
subjective restrictions and the indices hereby describe supply developments in the Danish
covered bond market as accurately as possible. See the general index criteria below.
Selection criteria
General index criteria
Bonds in the index
 DKK-denominated covered bonds.
 Callables, non-callables, capped floaters and floaters.
 Issued by RD, Nykredit, Totalkredit, BRF, Nordea Kredit, Danske Kredit and DLR.
 All DKK-denominated government bonds.
 No corporate bonds or bonds issued by semi-public issuers (Kommunekredit, Danish Ship
Finance, etc.).
 Minimum liquidity (outstanding amount) of DKK2bn.
Set-up
 Index rebalanced once a month, on the first trading day of the month.
 Nominal weights kept unchanged until the next rebalance.
 Prepayments are reinvested in the bond on the date of publication.
 Block issues are handled manually and on a case-by-case basis.
 Risk indicators are calculated on official average prices from the CSX.
 The base date is 30 December 2005.
Danske Markets’ official market indices
 The five basic market segments.
 A bond market index based on the market value weights of the five market segments – both
covered and government bonds.
 A covered bond (mortgage bond) index based on the market value weights of the four
covered bond segments.
Source: Danske Markets
Danske Markets’ CM indices are based on a market index in which the duration target is
governed by a swap overlay. The swap overlay consists of a single swap, the 10-year
swap, which makes for a transparent calculation method and an unambiguous effect on
the overall curve exposure. The swap principal is refinanced on the first trading day of
each month, which is exactly the same time as the market indices. Depending on market
conditions and the given duration target, the 10-year swap will either be a payer or a
receiver swap.
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Danske Markets’ CM indices
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By implementing the constant maturity requirement using a swap overlay, the connection
between the duration target and the weight allocation for the market index bonds is
eliminated. As a result, a covered bond investor can make investment decisions based on
the current market conditions without having to worry about the overall interest rate
sensitivity of the portfolio and later adjust the portfolio duration by using a liquid 10-year
payer or receiver swap for a specific duration target.
Danske Markets’ official CM index is CM0, CM3, CM5 and CM7 on the market index
and the covered bond index
Official CM indices
Danske Markets’ official indices are available on www.danskemarkets.com and on
Bloomberg (DBXX<GO>). Customised benchmark indices can be forwarded by e-mail
on a daily or monthly basis as requested.
Availability
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11. Futures on Danish covered bonds
The NASDAQ OMX stock exchange introduced a bond future on a basket of underlying
Danish covered bonds in October 2009 and at the same time established a market maker
scheme in the future (initial spread of DKK0.10 for DKK50m). The future settled daily
on a marked-to-market basis and the settlement amount is fixed by the NASDAQ OMX
as the difference between the current future price and the future price for the previous
trading day. Settlement is made via the NASDAQ OMX, which is where netting of
positions between market makers is carried out.
The basis of the agreement in the market maker regime is a CSA plus any premiums, or
alternatively a clearing account with the NASDAQ OMX.
Table 46. Settlement procedure for market makers
Settlement
Daily settlements via NASDAQ OMX
Netting
Yes
Agreement base
CSA plus any premiums, or a clearing account with NASDAQ OMX
Source: NASDAQ OMX and Danske Markets
The Danish covered bond futures (MBF) expire every third month at the end of March,
June, September and December and settlement day is 1 April, 1 July, 1 October and 1
January (or the first business day thereafter). New future contracts are opened about a
month before the existing contract expires; thus positions in one future contract can
always be rolled into the next future contract – just like, for example German government
bond futures (Bunds, Bobl, etc.).
Characteristics similar to government
bond futures
There are currently three bond futures on Danish covered bonds. There are two bond
futures on 4% and 5% callable covered bonds6 and one bond future on three-year noncallable covered bonds. The current future contracts expire (fixing) on 27 June 2012 (see
table below). The contracts have a contract size of DKK1m and a tick size of DKK0.01.
Table 47. Futures on Danish covered bonds with expiry 27 June 2012
ID
SE0004416691
SE0004416709
Name
3YMBFM2
4MBFM2
5MBFM2
Expiry (fixing)
27-Jun-12
27-Jun-12
27-Jun-12
Contract size
Tick size
Underlying basket
SE0004416717
DKK1m
DKK1m
DKK1m
DKK 0.01
DKK 0.01
DKK 0.01
5% 2035 (10%)
2% Jan-15 (25%)
4% 2041 (25%)
2% Apr-15 (25%)
4% 2044 (25%)
5% 2038 (20%)
2% Apr-16 (25%)
4% 2044io (25%)
5% 2038io (30%)
2% Oct-16 (25%)
3,5% 2044 (25%)
5% 2041 (25%)
5% 2041io (15%)
Source: NASDAQ OMX
6
A future on Danish callable covered bonds would be closed when the price of the future
exceeds 100.5. The 5MBFM2 is currently trading above 100.5 and is therefore closed.
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The Danish covered bond futures each consist of a basket of underlying unit bonds. Every
underlying unit bond has to consist of at least two covered bond series (i.e. from different
mortgage banks or ‘colours’). For example, the future contract (3YMBFM2) on threeyear non-callable covered bonds consists of four unit series (2% Jan-15, 2% Apr-15, 2%
Apr-16 and 2% Oct-16), each weighted 25%. At delivery, the seller of the future contract
can choose freely which of the different underlying bond series (which issuers) to deliver.
Thus, a delivery option is included in the future similar to that seen in, for example,
German government bond futures (Bunds, Bobl, Schatz, Buxl).
Contract base
The table below lists the bonds in the underlying basket of the 3YMBFM2 that are due to
be delivered when the future expires.
Table 48. Bond series to be delivered on the 3YMBFM2 bond future
Series
ISIN code
Name
2% Jan-15
DK0009783029
2,00 Nykredit 12H B ja nc 2015
DK0009287203
2,00 Realkredit Danmark 10T JA 2015
DK0002023126
NDA 2.0 01/01/2015
DK0009776916
NYK 2.0 04/01/2015
DK0009282832
RD 2.0 04/01/2015
DK0002024017
NDA 2.0 04/01/2015
1.3
DK0009784423
2,00 Nykredit 12H B ap nc 2016
1.4
DK0009286239
2,00 Realkredit Danmark 10 T 2016
5.7
DK0002025337
NDA 2.0 04/01/2016
DK0009785073
2,00 Nykredit 12H B ok nc 2016
2% Apr-15
2% Apr-16
2% Oct-16
Volume (DKKbn)
4.9
12.0
5.5
8.6
12.5
0.8
15.1
Source: NASDAQ OMX
Delivery is at the fixing price on the coupon day of the underlying bonds, or else the next
business day. The fixing price is calculated by the OMX immediately after 10:00 on the
expiry day of the future contract. The calculation is based on the prices quoted by the
various market makers (published by Reuters) for the underlying covered bonds. The
fixing is calculated as an average of the middle prices of the various market makers after
ignoring the highest and lowest price. The fixing is calculated to three decimal places and
published at 11:30 on the day of expiry.
Delivery, fixing and calculation
The seller of the future contract can freely choose among the various issuers (‘colours’) in
the basket of unit bonds when delivering, though delivery must of course be in
accordance with the weights stated above. Therefore, the seller of the future contract has a
delivery option on the underlying bonds, while the buyer of the future contract has
implicitly sold this delivery option.
The Danish covered bond future offers non-Danish investors – who have otherwise been
reluctant to invest in the Danish market due to various inexpediencies – an easy way to
invest in Danish covered bonds. These inexpediencies include prepayments that backoffice systems cannot handle, or other things that could keep certain investors from
investing in a fixed-rate callable bond. With the MBF, this type of investor can trade
Danish covered bonds in a transparent market without having to worry about actual
prepayments. Also, the Danish covered bond future is an easy way for investors to trade
the spread between Danish covered bonds and government bonds.
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12. Available information
The Danish mortgage banks provide information to investors via the NASDAQ OMX
Nordic Exchange (OMX). The OMX publishes data on Danish covered bonds according
to specified guidelines. These data are released on specific dates and at specific times. If
one of these specific dates falls on a non-working day, publication generally takes place
on the next working day.
The OMX publishes cash flows for each individual bond. These specify principal and
interest payments for all coming payment dates until the bond expires. For open series,
cash flows are calculated according to the principles of the OMX, while actual cash flows
for the closed series are published by the mortgage banks.
Cash flows: on a quarterly basis
Details concerning debtor distribution are provided by the mortgage banks and separate
the underlying loans into borrower groups, remaining debt groups and loan types.
Debtor distribution: on a monthly basis
Mortgage banks publish on a weekly basis data on preliminary prepayments comprised of
nominal extraordinary repayments for coming, non-published payment dates. Data are
based on registered loan terminations for coming payment dates, including immediate
prepayments but excluding repayments by delivery of bonds.
Preliminary prepayments: on a weekly
basis
On a quarterly basis, mortgage banks publish data on published repayments (ordinary as
well as extraordinary) for the next payment date comprised of nominal repayments as
well as total repayment and prepayment percentages.
Published repayments: on a quarterly
basis
Table 49. Available information
Data
Calculated
Sent to OMX
Available from OMX
Quarterly
12 working days after the payment date
13 working days after the payment date
Monthly
Fourth Thursday of every month
Same day
Every Friday Monday after the calculation day
Same day
Quarterly
Publication date
Cash flows
Payment date, instalment, interest
Debtor distribution
Borrower group, remaining debt, loan type
Preliminary prepayments
Payment date, nominal amount
Published repayments
Payment date, nominal amount, total
repayment percent., prepayment percent
One working day before the publication date
Source: Danske Markets
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13. Issuing and trading Danish
covered bonds
Unlike most other types of bond issuance, which occur through a single auction or series
of auctions (tranches), the majority of Danish covered bonds are issued by means of
‘taps’. A tap issue refers to an ongoing type of periodic issuance, typically daily, in
response to loan origination and refinancing.
Until the 1980s, Danish covered bonds were issued directly to individuals in need of
mortgage finance. If a customer needed DKK50,000 to purchase a house, that customer
would enter into a borrowing agreement with the mortgage bank and receive a mortgage
bond in return, which the customer would then sell in order to obtain the funds needed to
purchase the property.
Bonds issued directly to borrowers
until 1980s
During the changeover from a bearer bond system to a registered bond system, practice
was altered and the mortgage associations began to issue covered bonds on behalf of a
pool of mortgage borrowers. The practice of regular and periodic issuance continued,
however, with bonds being issued in larger denominations and the underlying mortgage
borrowers retaining a call option on their borrowings, allowing them the right to repay the
funds advanced. Tap issuance occurs on a daily basis in very large amounts.
Subsequently, as issuance volumes grew larger, an auction system was introduced for
non-callable bullet bonds (see Chapter 5). Traditionally, the Danish covered bond issuers
held a single annual refinancing auction but in recent years the Danish mortgage banks
have increased the number of refinancing auctions to two or three auctions per year in
response to volume growth.
Auction of non-callable bullet bonds
The issuance activity in the different covered bond segments is to a large extent driven by
the slope of the refinancing curve, especially for 30-year callable covered bonds and the
non-callable covered bonds, which are used to fund the interest-reset loans. For example,
in an interest environment with a steep refinancing curve with low yields at the short end
of the curve and high yields on 30-year callable fixed rate covered bonds, we usually see
high issuance activity in the non-callable covered bonds. The chart below shows the
correlation between the steepness of the covered bond refinancing curve (yield on a 30year callable covered bond minus yield on a one-year interest-reset non-callable covered
bond) and the issuance amount of non-callable covered bonds as a share of the total
issuance in Danish covered bonds.
Issuance activity is to a large extent
driven by the slope of the refinancing
curve
Chart 32. Correlation between issuance in non-callables and the refinancing spread
Non-callable bullet bonds (share in %)
refinancing spread (rhs)
400
100%
80%
300
60%
200
40%
100
20%
0
0%
'04
'05
'06
'07
'08
'09
'10
'11
Source: Danske Markets
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Trading Danish covered bonds
When trading covered bonds, the investor must allow for several practical elements. In
this chapter we also focus on the liquidity of covered bonds compared with that of
government bonds and where to find current bond prices.
Turnover affected by global crisis
The Danish covered bond market has historically enjoyed very deep secondary market
liquidity with a high average daily turnover but, as the chart below shows, daily turnover
was reduced significantly during the financial crisis in 2008 and 2009. However, the low
turnover did not hinder tap issuance in Danish covered bonds from the mortgage banks
during the financial crisis.
Chart 33. Daily turnover for Danish covered bonds (DKKbn)
Avg. Daily turnover (non-repo)
Avg. Daily turnover (repo)
Total
140
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
Source: NASDAQ OMX Nordic Exchange
Traditionally, the liquidity of covered bonds has been exceeded by government bond
liquidity. However, during times of extraordinarily high levels of mortgage prepayments
and high issuance activity this will not be the case, as covered bonds experience increased
liquidity in such periods.
Turnover Danish bonds
The table below shows the average daily turnover for selected Danish government bond
and Danish covered bonds. As the table shows, the turnover of some of the most liquid
covered bonds has exceeded the turnover of Danish government bonds in recent years
despite the financial crisis. The table also shows that the liquidity has been very high for
the one-year non-callable covered bonds in recent years. This is due primarily to high
issuance activity and refinancing auctions.
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Table 50. Average daily turnover (DKKm)*
2009
2010
2011
5% Govt. 2013
17
39
1,561
4% Govt. 2015
46
68
1,199
4% Govt. 2019
68
150
2,557
4.5% Govt. 2039
12
25
518
220
297
1,108
4% 2035 Callable
4% 2035io Callable
4% 2038 Callable
4% 2038io Callable
8
18
10
100
108
306
339
88
110
5% 2038 Callable
252
271
592
5% 2038io Callable
481
299
1,249
1Y DKK Non-callable
4,599
3,377
3,396
1Y EUR Non-callable
910
478
397
* The average daily turnover on Danish covered bonds is the average daily aggregated turnover for series
issued by Realkredit Danmark, Nykredit, Nordea Kredit and BRFkredit
Source: NASDAQ OMX Nordic Exchange
Danske Bank quotes prices for the most liquid government bonds and covered bonds. The
prices are available from Bloomberg (DBDK) and Reuters chain (DKMTG=DDBK and
DKFLEX =DDBK).
Highly liquid and diversified issuance,
bond prices quoted by Danske Bank
A bond series of the same type but issued by different mortgage banks may see a slight
difference in its prices when close to or above par as a consequence of different debtor
distributions. A price difference may also be attributable to differences in liquidity and
rating differences.
Differences in prices of otherwise
identical series
It is possible to raise loans with the Danish central bank against collateral in Danish
covered bonds. The maximum loan limit depends, inter alia, on the value of the collateral
(after margin and haircuts). In addition, EUR-denominated covered bonds issued through
a Luxembourg-based central securities depositary (VP Luxembourg) are ECB eligible.
Repo facility at the Danish central bank
and the ECB
With above 2,000 Danish covered bonds listed on the NASDAQ OMX Nordic Exchange,
it is evident that not all of them are equally liquid. Typically, the most liquid bond series
are those which are open for issue but fair liquidity is also offered among the older series.
Market maker scheme ensures
liquidity
A market-making scheme ensures liquidity for the securities. In order to support the
secondary market, seven banks have signed voluntary agreements to act as market
makers.
According to the market-maker scheme the seven banks are obliged to offer prices (bid
and ask prices) on the covered bonds included in the market-making scheme.
Besides a temporary reduction in amounts offered, the market-maker agreement has been
unaffected by the global financial crisis and bid-ask spreads remained at DKK0.10 at all
times for the most liquid bonds.
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Sources

Association of Danish Mortgage Banks.

BRFkredit.

Danmarks Nationalbank.

Danske Markets.

DLR Kredit A/S.

European Mortgage Federation (EMF).

FIH Erhvervsbank A/S.

Fitch Ratings.

LR Realkredit A/S.

Moody’s Investor Service.

NASDAQ OMX Nordic Exchange.

Nordea Kredit.

Nykredit.

Reuters EcoWin.

Realkredit Danmark.

Standard & Poor’s.

Statistics Denmark.
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Disclosure
This research report has been prepared by Danske Research, a division of Danske Bank A/S (‘Danske Bank’).
The authors of the research report are Christina Falch (Senior Analyst), Jens Peter Sørensen (Chief Analyst), Jan
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