FlexKort TM. CITA Referencing Floating Rate Loans Launched by Realkredit Danmark. August 2013

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1 FlexKort TM CITA Referencing Floating Rate Loans Launched by Realkredit Danmark August 2013

2 Key Take-Aways New floating rate mortgage referencing six months CITA rates launched by Realkredit Danmark under the trademark FlexKort TM Peer mortgage banks committed by agreement with Ministry of Business and Growth to follow suit before year end Three-year covered bonds issued out of Realkredit Danmark s Capital Centre T for the funding of FlexKort TM on a pure pass-through basis Terms in the range from one to ten years targeted Covered bonds will be opened and closed at the discretion of the issuer This enables Realkredit Danmark to actively manage liquidity and refinancing volumes FlexKort TM will provide Realkredit Danmark with longer-term funding than FlexLån F1 FlexKort TM is instrumental to Realkredit Danmark s compliance to a future Net Stable Funding Requirement FlexKort TM will be competitively priced against FlexLån F1 FlexLån F1 borrowers across all segments advised to move out the yield curve or refinance into FlexKort TM p2

3 CITA New Standard in Mortgage Banking? Transition to CITA standard from CIBOR standard and possibly interest-reset standard Capped floating-rate loans 221bn? Fixed-rate Interest-reset CIBOR CITA CIBOR rates stigmatised following LIBOR scandals and to a lesser extent CIBOR debacle, yet some corporate exposures are expected to stay on CIBOR standard because of open swap positions Mortgage banks will have strong interest in only operating a single standard for covered bond liquidity and advisory services considerations CITA standard likely to replace CIBOR standard on (uncapped) floating-rate mortgages, yet the open question remains whether the CITA standard will prevail over the interest-reset standard p3

4 FlexKort TM Fact Sheet Bond characteristics SDROs issued out of Capital Centre T (rated AAA/AA+) Term to maturity 1 to 10 years First issue matures on 1 July 2016 Coupon First issue initial coupon of 35bps per annum Future coupons set as CITA 6M * 365/360 plus spread Spread on first issue of 30bps per annum (Bond target price of to 99.90) Spread on new issue refinancing this issue to be determined at auction Amortisation Hybrid amortisation 10 year interest only option Non-callable Fixing Fixing on fourth last banking day prior to 1 January and 1 July Issuance Par rule observed Initial bloc-issue of 2bn Listing and registration Listed at Nasdaq OMX Nordic Copenhagen Registered at VP Securities FlexKort TM is based on known product platform The product will be on offer to all (domestic) borrowers across segments p4

5 CITA vs CIBOR Rates Agreement on reference rates between Ministry of Business and Growth and financial industry signed in September 2012 Banks committed to establish CITA reference rates based on quotations from as many banks as possible for terms ranging from 1 week to 1 year Ministry of Business and Growth committed to established public oversight on the fixing of CIBOR and CITA reference rates Mortgage banks offering mortgages referencing CIBOR rates committed to offer mortgages referencing CITA rates as well before end 2013 Mortgage banks further committed to offer refinancing of mortgages referencing CIBOR into mortgages referencing CITA when feasible Mortgage banks further committed to offer capped floating rate mortgages referencing CITA rates should a well functioning CITA/EONIA swaptions market be established p5

6 CITA vs CIBOR Rates (continued) CITA CIBOR Abbreviation for Copenhagen Interbank Tomorrow/Next Average Copenhagen InterBank Offered Rate Definition The CITA reference rate is the rate at which actual CITA swaps of specific maturities are quoted any given day CIBOR is the interest rate at which a bank is prepared to lend Danish kroner to a prime bank on an uncollateralized basis for maturities up to 1 year Fixing CITA is fixed daily as a weighted average of the reported T/N turnover from six major banks in Denmark CIBOR is fixed daily as a weighted average of reported rates from six major banks in Denmark (subject to specific calculation principles) Credit risk In a CITA interest rate swap the T/N rates are exchanged for a fixed DKK interest rate, for a fixed period agreed upon by the swap contract. No exchange of principal is taking place, and hence there s only minimal credit risk The banks must take credit risk on the prime bank into consideration when quoting the CIBOR rate Actual trades Based on actual turnover figures from the day before No actual trades p6

7 CITA vs CIBOR Rates (continued) 6M CITA rates versus 6M CIBOR rates Estimated depth of CIBOR vs CITA swap markets 700 Bps 3500 DKKbn M CITA 6M CIBOR CIBOR CITA -100 Note: Estimated outstanding notional p7

8 Refinancing Procedure Example of Bidding Structure and Cut-off Volume (bid) Acc. volume Spread (bps) 500,000, ,000, ,500,000,000 2,000,000, ,000,000 2,250,000,000 0 : : : 250,000,000 7,700,000, ,000,000 8,000,000, ,000,000 8,100,000, : : : 500,000,000 11,750,000, ,000,000 12,250,000, Bn Bps In this example a target volume of 8bn is sold at a price of (par plus bond price cut) at a spread to 6M CITA at 10bps Bids are made in terms of amount and spread to 6M CITA Bond price is fixed at par plus bond price cut (i.e ) All bids below the cut-off fixing spread will be settled in full at the cut-off fixing spread For bids at the cut-off fixing spread proportional allocation may be used Bids accepted from all members with access to Nasdaq OMX Nordic Copenhagen s mortgage issuing sub-market p8

9 Covered Bond Issuance and Liquidity Three year covered bonds issued out of Capital Centre T (rated AAA/AA+) for the funding of FlexKort TM on a pure pass-through basis Covered bonds are opened and closed at the full discretion of Realkredit Danmark Realkredit Danmark will close bonds for issuance when the term becomes too short (e.g. shorter than two years) or the outstanding volume too great (e.g. greater than DKK30bn) Stylised Example A three-year bond (A) is opened for issuance and closed after one year when volume has been built up A five-year bond (B) is opened for issuance when (A) is closed. After 18 months this bond is closed and a new bond will be opened Upon the maturity of (A) a new bond (C) is opened only for refinancing purposes as the volume of this bond is deemed sufficient and manageable from a refinancing risk view closed This structure enables Realkredit Danmark to actively manage liquidity and refinancing volumes at any future refinancing date (B) This sets FlexKort TM apart from FlexLån where refinancing closed Refinanced volumes are implicitly set by the borrowers by their choice of refinancing profile Refinanced (A) (C) Par rule observed (albeit non-callable) to avoid capital gains tax on borrowers AUG 2013 AUG 2014 AUG 2015 AUG 2016 AUG 2017 AUG 2018 p9

10 Towards Longer-term Funding 80 Expected Spread to CITA rates vs term to maturity Bps Realkredit Danmark pursues an overall strategy of obtaining longer-term funding in preparation for future stable funding requirements 60 Realkredit Danmark expects covered bonds funding FlexKort TM to be priced on a relatively steep spread curve with spreads ranging from 17bps (0.5Y) to 71bps (10.5Y) Longer-term funding thus implies higher funding costs absorbed by the borrowers (pure pass-through principle) 40 Term to maturity of three years on first covered bond funding FlexKort TM set to balance the overall strategy against expected funding costs 20 At this term to maturity a spread to CITA rates of 37bps is expected for the covered bond to be priced at par Source: Danske Markets Years If the spread curve flattens Realkredit Danmark will target terms in the range from five to ten years going forward p10

11 Net Stable Funding Ratio and SIFI Recommendations 637bn Net Stable Funding Ratio Compliance 105bn 721bn 750bn 29bn 532bn Covered Bonds >1Y Senior debt Liable Capital Available Funding Required Funding Deficit Available Funding Required Funding Deficit 2013Q2 2018Q2E Net Stable Funding Ratio was proposed by the Basel Committee in 2010 Financial institutions required to fund their assets (except short-term securities) with sources of stable funding (e.g. bonds with a remaining term >1Y) Net stable funding requirement imposed on systemically important financial institutions (SIFIs) recommended by Danish SIFI committee in March 2013 Realkredit Danmark projected to reduce Net Stable Funding Ratio compliance deficit from 105bn to 29bn in 2018 assuming interest reset loans F1 be refinanced into FlexKort TM or interest reset loans F2-F10 with a 5 year average term to maturity on covered bond funding at a 20 percent rate per annum Realkredit Danmark initiatives are necessary to ensure compliance with possible future regulations p11

12 Borrower Demand Encouraged by Pricing 160 Bps Pricing of FlexKort TM vs FlexLån F1 Realkredit Danmark will encourage demand for FlexKort TM by price incentives bps Funding costs are expected at 40bps which compares to 30bps for interest reset loans F1 (annualised) Difference in funding costs more than offset by bond price cut at refinancing of 7bps per annum for Flexkort TM and 30bps per annum for FlexLån F1 respectively Pricing difference visible to borrowers when comparing loan yield to maturity or loan APR 20 Free of fees campaign (worth up to 5,000) when refinancing FlexLån into FlexKort TM 0 FlexKort TM FlexLån F1 Funding rate Margin Bond price cut at refinancing Realkredit Danmark will advise borrowers to refinance FlexLån F1 into FlexKort TM or move out the yield curve p12

13 Disclaimer This publication has been prepared by Realkredit Danmark for information purposes only and should be viewed solely in conjunction with the oral presentation provided by Realkredit Danmark. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for retail customers in the UK or any person in the US. Realkredit Danmark A/S is a subsidiary company of Danske Bank A/S. Danske Bank A/S is authorised by the Danish Financial Supervisory Authority and subject to limited regulation by the Financial Services Authority (UK). Details on the extent of our regulation by the Financial Services Authority are avail-able from us on request. Copyright (C) Realkredit Danmark A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission. p13