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Nykredit to Reduce Junior Bonds as Collateral Need Ebbs

Nykredit A/S, Europe’s biggest issuer of covered bonds backed by mortgages, plans to reduce its issuance of junior bonds backed by collateral, Chief Financial Officer Soeren Holm said.

Nykredit had used junior covered bonds to fulfil collateral requirements linked to loan-to-value ratios. The need for the securities is declining as house values stabilize, meaning the Danish lender won’t have to issue as many of the securities, Holm said.

“We think the LTV levels will flatten,” Holm said in an interview at Nykredit’s headquarters in Copenhagen yesterday. “It’s starting to look relatively good in the bigger cities.”

Denmark’s housing market is showing signs of stabilizing after prices dropped about 25 percent from their 2007 peak. Mortgage lenders in the Nordic country have to put up 246 billion kroner ($41 billion) in extra collateral to comply with demands from financial regulators and ratings companies, the central bank said in June.

“It’s expensive for the mortgage banks,” Jens Peter Soerensen, chief analyst at Danske Bank A/S, Denmark’s largest commercial lender, said in an interview. “Nobody else has this kind of a construction. This is a Danish specialty.”

House prices

European-wide covered-bond legislation, adopted by Denmark in 2007, requires lenders to provide the extra collateral if house price fall. In Denmark, mortgage banks are required to ensure that bonds issued equal loans outstanding. As a result, lenders can’t buy back bonds and fund loans from other sources such as deposits if LTV ratios increase, as they can in other countries.

House prices have stabilized after hitting a low in December, according to an index published monthly by the Danish statistics agency. The six-year-old measure of sales values was 84.2 in May, compared with 83.8 in December.

After Danish lenders adopted the covered-bond legislation, they have provided 122 billion kroner in supplementary collateral to meet the law and a further 124 billion kroner to meet rating companies’ demands, the central bank said in June.

Nykredit reported yesterday a 44 percent increase in junior covered bonds outstanding, to 45.2 billion kroner, as of June 30 from the end of last year. Net interest expenses related to the bonds almost doubled, to 186 million kroner, in the first six months of this year compared with a year earlier, it said.

“Nykredit’s funding costs have grown in the past year in line with general market trends,” the mortgage lender said. “However, Nykredit continues to have good access to capital market funding.”

The lender’s loan-to-value ratio rose more slowly. The ratio increased by 1.8 percentage points to 75.1 percent this year from 2011, it said. That compares with a 7.4 percentage point increase for the previous period.

“Overall, it should be more or less flattening,” Holm said.

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