Danske Bank breaks up with Moody’s over mortgages

Posted by Tracy Alloway on Jun 28 11:01.

Last week, from Bloomberg:

Danske Bank A/S’s mortgage lending unit Realkredit Danmark told Moody’s Investors Service to discontinue its ratings of the company as it creates a separate capital unit for its adjustable-rate mortgages. The Copenhagen-based lender will issue covered mortgage bonds through a new capital center to finance new and existing adjustable-rate loans, it said in statement. Fixed- and variable-rate loans with a rate cap will continue to be funded via an existing capital center, the lender said.

This week, from Bloomberg:

Danske Bank A/S said the Basel Committee on Banking Supervision and Moody’s Investors Service don’t understand Denmark’s mortgage bonds and warned their actions may hurt the world’s third-largest covered debt market. The mortgage unit of Denmark’s biggest bank said last week it will stop paying Moody’s to rate its securities after learning it would lose its AAA credit grade unless it found an extra $6.2 billion in capital. At the same time, Denmark is lobbying the European Union to ease Basel’s liquidity requirements for banks, which it says will penalize the country’s covered bonds and trigger a sell-off.

Doth the Danish bank protest too much?

Moody’s said earlier this month that it wants to increase refinancing margins for some Danish covered bonds after a “material rise” in adjustable-rate mortgages (ARMs) in Danish cover pools. The agency says ARM loans usually mature after 20 to 30 years, while covered bonds mature every one to three years — which means there’s a potential refinancing risk as issuers have to roll over the CBs.

According to Moody’s, ARM loans now make up over half of all outstanding covered bonds in Denmark. And as Bloomberg notes, that new shift away from fixed-rate ‘traditional’ mortgage products, combined with reduced government support for Danish banks, is making Moody’s a cautious bunny, for once.

Meanwhile, Realkredit decided it was going to follow Nykredit’s example and set up a “new capital centre” to finance even more FlexLån® loans — which, you guessed it, is its trademark name for uncapped ARM mortgages. At which point Moody’s demanded Realkredit find some DKK 32.5bn ($6.2bn – yes billion) in extra capital to keep its current AAA rating — and bingo, one big ratings spat.

Realkredit’s long-ARMed hopes and dreams now rest on Moody’s competitor Standard & Poor’s, which rates the unit triple-A. Funnily enough, S&P was itself the subject of a spate of covered bond rating withdrawals, after it said it wanted to tweak its methodology to better account for counterparty risk.

Funny how these things develop, eh?

Funny too, that Fitch has just changed Danske Bank’s outlook to negative on Tuesday.

Related links:
Wanted: international buyers of Danish mortgage bonds – Citizen Economists
Another Danish bank falls into a fjord of failure – FT Alphaville
The covered bond craze – IndexUniverse

This entry was posted by Tracy Alloway on Tuesday, June 28th, 2011 at 11:01 and is filed under Capital markets. Tagged with , , , , , , , , , .

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