Danish Mortgage Lenders May Struggle to Sell Notes at Auction

By Bo Nielsen

Dec. 1 (Bloomberg) -- Danish lenders may struggle to sell as much as $67.5 billion of mortgage notes in annual auctions starting today as the global financial turmoil saps investor appetite.

The year’s sales come amid a backdrop of falling house prices, rising foreclosures and an economy that entered a recession before any other in Europe. Interest rates are reset each year for adjustable-rate loans in Denmark’s $363 billion mortgage-bond market, the world’s third-biggest, as investors such as pension funds bid for the securities.

“I just can’t see where the buyers will come from,” said Kim Mikkelsen, who manages about $173 million as chief investment officer at Nordic Asset Management A/S in Copenhagen and whose Aaasgaard Fixed-Income Fund ranked first and fifth among European fixed-income hedge funds in 2007 and 2006, according to HedgeFund Intelligence. “We’re rather tense getting into the auctions.”

Danish mortgage notes lagged behind government bonds since mid-September for the first time in almost three years as investors shunned the debt. About 438 billion kroner ($76 billion) of mortgage bonds expire this year, about 90 billion kroner more than in 2007, according to Danske Bank A/S.

While still the world’s largest after the U.S. and Germany, Denmark’s mortgage market shrank in October to its smallest in more than a year as the fallout from the global credit crisis prompted investors to sell everything but the safest assets. Foreign investors and local mutual funds cut their holdings of Danish mortgages by 13 percent that month, Copenhagen-based Nationalbanken said in a note Nov. 17.

Falling Prices, Foreclosures

The Danish economy will shrink 0.2 percent this year and 1.4 percent in 2009, according to Deutsche Bank AG. House prices fell for three consecutive quarters and an annual 5.2 percent in the three months through September, the Association of Danish Mortgage Banks said Oct. 23. Foreclosures jumped 17 percent to a 12-year high in October, according to Statistics Denmark.

To shore up the market before the auction, the government agreed last month to let pension funds change the way they calculate future obligations. In response, the state-controlled Sociale Pensionsfond said it would invest as much as $3.8 billion in one-year non-convertible mortgage bonds, the central bank said on Nov. 3. Pension funds hold about 25 percent of Denmark’s outstanding mortgage debt.

Though demand for Danish mortgage bonds slackened this year, they haven’t defaulted since they were introduced following the great fire in Copenhagen in 1795. Billionaire George Soros wrote in an Oct. 10 article in the Wall Street Journal the market “remains the best-performing in Europe during the current crisis.”

‘Done Enough’

“The government has done enough to ensure that prices will be stable at the auction,” said Jens Peter Soerensen, a Copenhagen-based chief fixed-income analyst with Danske Bank, whose Realkredit Danmark A/S unit will start the auctions today. “The buyers will be there.”

For Nordic Asset Management’s Mikkelsen, who plans to buy mortgages at the auction, the yield on the one-year mortgage note may rise to about 100 basis points above the benchmark Danish swap rate as investors demand higher compensation to hold the securities.

The yield on the benchmark 4 percent non-callable mortgage note maturing 2010 surged to 5.95 percent on Oct. 28, the highest since at least April, 2002, from 5.05 percent at the start of the month, according to Danske Bank. It plunged to 4.367 percent after the government rescue package was announced Oct. 31. It was at 5.106 percent at the end of last week, 68 basis points above the swap rate.

‘No Longer Nervous’

Mortgage lenders including Nykredit Realkredit A/S and BRFkredit A/S will issue up to $56.2 billion in kroner- denominated bonds maturing 2010, 2012 and 2014 at the auction and about $11.6 billion in euro-denominated mortgages, Soerensen said in a Nov. 25 note.

“Until the end of October we were a bit nervous about this auction but we’re not anymore,” said Jacob Skinhoej, chief fixed-income analyst in Copenhagen for Nordea Bank AB, Scandinavia’s biggest bank, which will also sell notes at the auction. Foreign and domestic investors may buy $5 billion less of the notes than at prior auctions, he said.

Denmark’s central bank will cut its benchmark interest rate by 0.75 percentage points to 4.25 percent on Dec. 4, mirroring the European Central Bank, in an attempt to buoy the economy, according to Danske Bank. Policy makers unexpectedly raised the key rate twice in October, lifting it to an eight-year high of 5.5 percent, to protect the krone’s peg to the euro.

The three-month Copenhagen Interbank Offered rate, or Cibor, was 214 basis points more than the euro interbank offered rate, or Euribor, on Nov. 28. The spread widened 188 basis points since the end of September.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net