Refinancing risk


Refinancing risk is the risk that debt will have to be refinanced at an unusually high cost or, in extreme cases, cannot be refinanced at all. To the extent that refinancing risk is limited to the risk that debt might have to be financed at higher interest rates, including changes in credit spreads, it may be considered a type of interest rate risk. However, because the inability to refinance debt and/or exceptionally large increases in government funding costs can lead to, or exacerbate a debt crisis and thereby cause substantial economic losses, in addition to the purely financial effects of higher interest rates, it is often treated separately.

A number of indicators can be used in management of refinancing risk. Maturity profile, short-term refinancing volume and average term to maturity are often used as indicators in the ongoing refinancing-risk management. These indicators will be published on the first banking day of each month.

The volume of short-term assets is a significant element in the overall assessment of refinancing risk. In recent years, the balance on the central government's account has been more than sufficient to cover all redemptions and interest payments for more than one year ahead.

Indicators of refinancing risk

In order to facilitate access to updated information on the Danish government debt structure, indicators will be published on the first banking day of each month. The indicators focus on the domestic liabilities. Data and charts can be found here.

Maturity profile

The maturity profile provides an overview of the volume of payment obligations (redemptions and coupon payments) facing the central government in the coming years.

Methodology:

  • The indicator focuses on the calendar year.
  • The amounts include both maturing T-bills and bonds (i.e. repayment of principal) and coupon payments on bonds. In principle, coupon payments are payment obligations in line with repayment of the principal and should be seen together.
  • Interest payments are stated as actual interest payments on a non-accrual basis.
  • Future payments on the inflation-linked bond are uncertain due to the indexation. It is assumed that the index coefficient increases by 2 per cent a year, calculated from the value of the index coefficient by the end of last month.

 

Domestic redemption profile

 

Short-term refinancing volume

The short-term domestic refinancing volume is stated as the sum of maturing existing government securities (bonds and T-bills) and interest payments on existing bonds over the coming 12 months. The indicator expresses the size of the payments on the domestic debt to be made by the central government in the short term.

Methodology:

  • The indicator is based on a 12-month rolling window.
  • The amounts include all domestic bullet loans and T-bills. Interest payments are included and shown separately.
  • Interest payments are stated as actual interest payments on a non-accrual basis.
  • Future payments on the inflation-linked bond are uncertain due to the indexation. It is assumed that the index coefficient increases by 2 per cent a year, calculated from the value of the index coefficient by the end of last month.

 

12-month ahead refinancing profile

 

Average term to maturity (ATM)

The average term to maturity (ATM) summarises the entire maturity profile of the domestic liabilities in one figure. This indicator is published both with and without T-bills.

 An example showing the calculation of ATM can be found here.

Methodology:

  • The indicator includes all maturing domestic bullet loans, including T-bills, and coupon payments on bonds.
  • The average term to maturity is calculated as a weighted average of the time until maturity and coupon payments, the weights being the payments' shares of the total nominal payments.
  • The number of years to a given payment is computed as the number of days divided by 365.25.
  • Future payments on the inflation-linked bond are uncertain due to the indexation. It is assumed that the index coefficient increases by 2 per cent a year, calculated from the value of the index coefficient by the end of last month.

 

Average term to maturity

 

More information

Data for the refinancing indicators are available for download:

  Refinancing indicators (Excel)

An example showing the calculation of ATM is available:

  Calculation of ATM (Excel)