~ 2017 Isin Nykredit Markets Danish Covered Bonds 2020/2021 Foreword by Michael Rasmussen, Group Chief ExecutivApe 1 ISSN 2596-7479 Contents Introduction 3 Danish economy 5 Danish housing market 6 Danish covered bond market, structure and legislation 7 Danish bullet covered bonds 11 Danish floaters and capped floaters 13 Danish callables 17 Nykredit Realkredit A/S 21 Realkredit Danmark A/S 27 Nordea Kredit Realkreditaktieselskab 33 Jyske Realkredit A/S 39 DLR kredit A/S 45 2 Introduction Markets contacts Research Jacob Skinhøj Introduction Nykredit Markets has a continued focus on the Nordic region as Head of Fixed Income & Nordic Research our core market, and we are pleased to introduce our covered [email protected], +45 44 55 11 27 bonds handbook for Denmark. With covered bonds outstanding equivalent of around EUR 390bn (DKK 2,905bn), the Danish Mathias Gottschalck market has become the largest in Europe after significant Fixed Income & Nordic research reduction in outstanding amounts of covered bonds in Germany [email protected], +45 44 55 11 07 and Spain. Even though Denmark is not a Eurozone country, 3% of outstanding covered bonds are EUR-denominated and Geert Ditlev Kunde 96% are DKK-denominated. Fixed Income & Nordic Research [email protected], +45 44 55 11 08 The Danish covered bond market is a very transparent market with a 220-year impeccable track record. All major issuers have Asbjørn Klein AAA rated covered bonds, which makes Danish covered bonds Fixed Income & Nordic Research more attractive in a shrinking AAA universe. [email protected], +45 44 55 11 37 The handbook includes an overview of macro-economic Troels Kromand Danielsen fundamentals and housing market trends in Denmark, as well Fixed Income & Nordic Research as a description of Denmark's covered bond market and [email protected], +45 44 55 11 26 relevant legislation. The handbook also includes a description of the individual profiles of all major Danish covered bond Sales, Copenhagen issuers. The issuer profiles address the key factors necessary Morten Schantz Andersen to evaluate an issuer's covered bonds, namely the issuer (or Markets Fixed Income & Credit parent) itself, the underlying cover pool(s), ALM and rating. [email protected], +45 44 55 13 87 If you have questions regarding the handbook, or covered Morten Charles Andreasen bonds in general, please do not hesitate to contact us. The Markets Fixed Income & Credit handbook is also available for registered users online at [email protected], +45 44 55 13 54 nykredit.dk/markets. Björn Marcel Peters Nykredit Markets Markets Fixed Income & Credit [email protected], +45 44 55 13 40 Copenhagen, June 2020 Website: nykredit.com 3 4 Danish economy Robust and well-diversified, AAA rated economy Healthy public finances and strong fiscal discipline Despite high debt levels, households have substantial net wealth Stable AAA outlook Danish households have reduced the debt share Denmark is one of only ten countries rated AAA by all of the three largest credit rating agencies. All of them have confirmed stable outlook after the corona outbreak accelerated. Danish public finances are healthy, and the country has a long- standing track record of long-term fiscal planning spanning multiple governments across several political parties. On top of this, Denmark receives its top rating based on its diversified production structure, a stable and consensus-based political environment, high labour market participation rates, a generally high educational attainment level and a flexible labour market combined with a generous social welfare system. Household debt has decreased over the past few years, but still accounts Danish households are financially robust for 270% of household disposable income. Danish households have considerable financial wealth. Financial assets total almost DKK 7,270bn, equivalent to 640% Source: Macrobond of disposable income or DKK 2.6m per household. Including housing wealth, total net wealth stands at DKK 3.8m per household. The high net wealth reflects a well-developed Household debt is matched by high wealth pension system as well as tax credit on savings. Both asset and DKKm per household debt levels are high relative to other advanced countries. Gross 4.0 debt represents some 270% of disposable income, which 3.5 almost entirely covers mortgages secured on real estate. Housing wealth Among financial assets, pension savings and shares constitute 3.0 the main part. The country as a whole has net foreign assets 2.5 Other amounting to almost 80% of GDP. 2.0 Notes and coins Other 1.5 Shares Strong public finances and robust economy 1.0 Other Thanks to Denmark’s healthy public finances, a generous social loans 0.5 welfare system can cushion households from loss of income Pensions Housing loans over the business cycle. Combined with a flexible labour market 0.0 Assets Liabilities this also ensures smoother necessary transitions over the Despite the high debt levels by international comparison, Danish business cycle and as a part of the technological progress and households have substantial net wealth. ongoing changing nature of the economy. Danish wage earners are less opposed to changing economic environments than Source: Danmarks Nationalbank, Statistics Denmark, Nykredit Markets many of their foreign counterparts. Before the outbreak of the coronavirus, the Danish economy Sound public finances with low public debt was in a moderate boom with no major imbalances, except for a considerable current account surplus. Households and firms were prudent during the upswing and reduced their debts. The Danish economy entered the outbreak on a strong foundation. Budgetary discipline is a cornerstone in the conduct of fiscal policy, and the regulatory set-up for fiscal policy ensures continued tight control of public expenditures. This has kept public debt low in Denmark. Few countries face the virus outbreak with as solid buffers as Denmark’s and with such good opportunities of mitigating the economic consequences. Considering Denmark's economic balances, a downgrade of its top rating should be far away. Denmark is one of only ten countries rated AAA by all of the Source: Macrobond three largest credit rating agencies. All of them have confirmed stable outlook after the corona outbreak accelerated. 5 Danish housing market Rising housing prices have increased homeowners' equity to the highest level since 2008 More homeowners are amortising loans and locking in their loan rate, reducing interest rate sensibility Homeowners are well prepared for the future Increasing prices in major parts of the housing market Outstanding loans Recent years' housing market growth continues. Danish housing prices increased in 2019, when employment and income rose in large parts of Denmark. Compared with 2014-2017, we saw moderate price increases in 2019, especially for owner-occupied flats and the Copenhagen area. In 2020, the corona crisis is likely to leave a mark on housing prices. We expect a price fall in 2020 followed by a run-up in prices in 2021. In 2020, we expect housing and flat prices to go down about 4.1% and 5.3%, respectively. By contrast, we foresee pre- crisis levels in 2022. Homeowners are in a robust situation with equity at an all-time high since 2008. This is mainly due to housing wealth having increased Variable interest rate with interest rate cap only includes data for loans to a new record-high level, driven by increasing housing prices. At where the rate cap has not been reached. The share of loans where the rate cap has been reached is minimal and not included in the chart. the same time, growth in housing debt has been very moderate for the past few years, which is partly because a large part of loans is Source: Macrobond, Danmarks Nationalbank amortisation loans. More loans with fixed rates and amortisation Interest rate sensitivity is limited in a Nordic context One of the greatest risks in the Danish housing market are interest rate increases, which are expected to dampen price developments Interest rate pass-through (% of outstanding loans) 100 and ultimately lead to price decreases in parts of the housing market. The risk of price decreases is greatest within areas, which 80 have seen strong growth over the past year. Against this backdrop, it is worth emphasising that the proportion of outstanding fixed-rate 60 housing loans has increased in recent years, while more people are Norway choosing to amortise their loans. This helps enhance resilience in 40 Sweden the Danish housing market, as interest rate sensitivity is reduced, and as housing debt is reduced through higher amortisation rates. 20 Denmark This trend should be seen in light of the option to lock in the loan 0 rate at the currently low level. Also, administration margins on loans 0M 3M 6M 1Y 5Y 30Y with short-term interest periods and without amortisation have increased. This is partly due to the Danish FSA's Supervisory Source: Danmarks Statistik, statistiska centralbyrån, statistisk sentralbyrå Diamond and a number of more recent efforts, which have tightened the requirements for lending for housing purposes. Forced sales and arrears Furthermore, for a substantial part of the borrowers having loans with an initial 10-year interest-only period, the interest-only periods are now expiring. It is worth emphasising that the interest sensitivity among Danish homeowners is very limited compared with our Nordic neighbouring countries, where a large share of debt has a variable interest rate compared to Danish standards. This means that an interest rate hike will affect 90% of homeowners' debt in Norway within three months compared with less than 20% in Denmark. Fewer borrowers default and avoid losing their homes Employment and income growth in combination with lower financing costs have made it easier for homeowners to meet their payment obligations. Accordingly, the arrears ratio has been on a sustained The arrears ratio shows the proportion of total mortgage payments at least low level for the last several years.