Danish mortage bonds win Soros backing

Bonds used to finance mortgages in Denmark are likely to remain popular with investors despite a downgrade threat from ratings agencies, according to Alan Boyce, who heads the Absalon Project – a joint venture involving hedge fund investor George Soros.

According to a report from Bloomberg, both Boyce and Jesper Berg, senior vice president at Europe’s biggest issuer of covered bonds Nykredit A/S, believe that the recent suggestions from Moody’s that such bonds are becoming more risky is one without merit.

Moody’s argument is based on the idea that an increase in adjustable rate debt becomes a problem for the market, which is characterised by bonds with maturities of 1-3 years used to finance mortgages that run over 20-30 years.

Bloomberg writes that Moody’s believes that issuers such as Nykredit A/S lose money if interest rates rise when debt is re-auctioned.

However, the issuers say that Moody’s simply does not understand the properties of the Danish mortgage bond market. Firstly, it has never defaulted in 200 years. Secondly, the market operates a so-called balance principle. This means that if interest rates rise it is the borrowers who pay the cost, and issuers only lose money if the borrowers default – in other words run a credit risk, not a market risk.

Moody’s is therefore being criticised for using a faulty model. Bloomberg notes that Danske Bank A/S unit Realkredit Danmark A/S last month said it would no longer use Moody’s ratings on its debt. Additionally, BRFKredit A/S has already started talking to Standard & Poor’s about using its ratings instead of Moody’s.

Boyce said that there was no reason he should be concerned by adjustable rate mortgage borrowers with loan-to-value ratios below 80% and is quoted calling Moody’s capital requirements “ridiculous”.

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