Denmark's biggest banks are firing Moody's Investors Service as they win assurances from some of the country's biggest investors that the opinions of ratings companies hold limited value.
Nykredit A/S, Denmark's biggest mortgage lender and Europe's largest issuer of covered bonds backed by home loans, terminated its contract with Moody's on April 13, citing its "volatile" views. Danske Bank A/S's mortgage unit Realkredit Danmark A/S, the country's second-largest home-loan provider, dropped Moody's in June. Jyske Bank A/S, Denmark's second-biggest listed bank, is looking into ending its dealings with Moody's, according to Steen Nygaard, its head of treasury.
"They have just crossed the line for fairness," Nygaard said in an interview. "It's not just that we have an opinion and if they rule against us, we are mad and walk away. It is about the fundamentals where we simply cannot follow Moody's arguments."
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Moody's in June criticized Denmark's $470 billion mortgage-bond industry, the world's third largest after the U.S. and Germany, for failing to curb refinancing risks fueled by a mismatch in funding and lending maturities. Since then, Nykredit's benchmark index of Denmark's most-traded mortgage bonds has risen 6.3 percent to a record, signaling investors are disregarding the warnings.
"Moody's has more or less every second month found something new to think about," Soeren Holm, group managing director of finance at Nykredit, said today on a conference call with investors.
The company "does not comment on its commercial relationships," Jessica Sibado, a Moody's spokeswoman, said in a phone interview yesterday. "Moody's considers Denmark as having one of the strongest covered bond frameworks in Europe. However, since 2009, Danish covered bonds have been impacted by the weakening issuer credit strength" and "increasing refinancing risks," she said.
The ratings company generated 31 percent of its $2.3 billion in sales last year from Europe, the Middle East and Asia combined, it said March 12. Nykredit and Jyske declined to reveal what they paid Moody's for their ratings.
"It's not that ratings don't matter. Of course they do," said Inger Huus Pedersen, head of fixed-income investments at Hellerup, Denmark-based pension fund PKA, which oversees about $27 billion in assets. "These mortgage bonds, we feel pretty secure about. It's an old system that's gone through a lot, which is why I'm quite secure about the system. History has shown us that ratings agencies make mistakes as well."
Senate Report
Investors, companies and governments are starting to question the role of the ratings companies following their failure to identify some of the imbalances that led to the global financial crisis of 2008.
According to a 2011 U.S. Senate report, both Standard & Poor's and Moody's adjusted the way they graded mortgage-backed securities after Goldman Sachs Group Inc., UBS AG and at least six more banks pressured them. When the ratings companies changed their assessments in July 2007, it helped trigger the financial crisis, the Senate Permanent Subcommittee on Investigations said in April last year.
Europe is in the process of reviewing regulation of the ratings industry. One proposal would force companies to periodically cut client ties to remove conflicts of interest and increase competition. Denmark, which holds the rotating six-month European Union presidency, recommended this month limiting the proposal's scope to structured finance instruments.
S&P's decision to strip the U.S. of its top credit grade in August was followed by gains in the nation's Treasury debt. U.S. government securities with maturities longer than a year have returned 4.2 percent, including reinvested interest, since S&P's Aug. 5 downgrade. The Bank of England said March 27 there was "little market reaction" to Moody's decision to cut the outlook on its Aaa rating to negative.
In Denmark, Moody's has been tougher on mortgage banks than other rating companies. It ranked adjustable-rate bonds issued by Nykredit Aa1, compared with S&P's AAA grade. Nykredit's issuer rating at S&P is A+, its fifth-highest grade, with a stable outlook. Moody's ranks the lender A2, its sixth-highest rating, with a negative outlook.
'Harsh Stance'
"Moody's has shown a harsh stance on banks ratings compared to the other agencies," said Marc Stacey, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $42 billion in credit. "If Moody's upcoming announcements show that they are an outlier, compared to where the other two rating agencies are, then you may find the Moody's rating being dropped by more and more issuers."
Nykredit fired Moody's amid a review of 114 financial institutions in 16 countries. Moody's said it may downgrade banks as much as three levels. BRFkredit A/S, another Danish mortgage lender, ended its dealings with Moody's in October.
"If larger banks begin to look at the Danish banks and follow suit, this could potentially reduce the impact of the rating cuts and simplify matters for investors," Prateek Datta, an analyst at Royal Bank of Scotland Group Plc, said today in a note to investors.
"It's not a matter of the rating being X or Y," Holm said in a phone interview this week. "It's a matter of volatility in their methods and approaches, and it's a matter of the value for investors."
Denmark's two-century-old mortgage market has moved away from traditional, fixed-rate 30-year loans and started offering adjustable rates in 1996 and interest-only loans in 2003 to attract more customers. The country is still struggling to emerge from a recession triggered by a burst housing bubble in 2007. A regional banking crisis claimed three lenders last year.
"We agree there are risks, but they are less than when the house prices were in a bubble phase," Nygaard said. "We cannot see the huge risk to the Danish economy. Jyske Bank is much stronger today that it was in 2007."
Moody's, which published its first guide to securities in 1900 after being founded by John Moody, cut Jyske Bank and five other Danish lenders last year after the government allowed Amagerbanken A/S to fail, passing losses on to senior creditors. Jyske is rated A2, with a negative outlook.
Moody's rates Denmark's government debt Aaa, with a stable outlook. The country is one of only 12 in the world to enjoy the top credit grade at Moody's, S&P and Fitch Ratings.
Debt Dynamics
While Denmark's government debt is half the euro-area average at 44.6 percent of gross domestic product in 2012, the European Commission estimates, its private debt is the world's highest. Household debt reached 310 percent of disposable incomes in 2010, according to Exane BNP Paribas. Danes' savings, while high, are mostly "locked up" in hard-to-access pension and real estate assets, central bank Governor Nils Bernstein has said.
Adjustable-rate loans, as well as loans that delay principal payments by as much as 10 years, make up more than half Denmark's outstanding homeowner debt, according to the Association of Danish Mortgage Banks. Bernstein has urged the industry to phase out interest-only loans, which he says erode economic stability.
Foreclosures jumped an annual 32 percent last month to a 17-year high, after Denmark's economy fell into a recession in the second half and house prices sank an annual 8 percent in the fourth quarter.
"What Moody's is doing is putting pressure on the system, and that is not necessarily a bad thing," said Peter Lindegaard, head of investments for Danica Pension, a unit of Danske Bank. Still, Lindegaard said Danica, which holds 20 billion kroner in mortgage debt, won't exit Nykredit's bonds after the lender dropped Moody's.
"We think we know as much as Moody's about how the system works," Lindegaard said in an interview. "We still deem them a very secure investment."
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