Nordic season!
A year ago Nordic banks had yet to issue Additional Tier 1, but 12 months on virtually all the region’s leading players have taken up the capital instrument — whether in euros, dollars or their local currencies. However, their ultimately limited AT1 needs have combined with high credit quality to ensure that issuance has in the main been easily absorbed. Neil Day reports.
As 2014 drew to a close, Moody’s analysts joined their peers in making forecasts for the coming year and those charged with covering Sweden came out with their call: Swedish banks would make early, large issuances of Additional Tier 1 (AT1) securities, motivated by early implementation of increased capital requirements.
In its 12 December report, Moody’s forecast that the four largest Swedish banks would issue at least Skr15bn-Skr22bn ($2.0bn-$2.9bn), excluding issuance to date, of AT1s by 2016, building up to Skr37bn ($4.9bn) by 2019.
Just three months on and the upper end of Moody’s shorter term forecast has already been all but reached by Sweden’s big four. Indeed, including a further issue from SBAB, total AT1 supply from Sweden this year has reached $3.05bn equivalent.
Swedbank and Svenska Handelsbanken debuted in February with $750m and $1.2bn deals, respectively. SBAB then launched its debut, a Skr1.5bn deal on 9 March, the week after Nordea had become the first Swedish repeat AT1 issuer with a $923m equivalent issue across US dollars, Swedish kronor and Norwegian kroner.
These transactions came after Nordea had opened Swedish AT1 issuance with a $1.5bn issue on 16 September 2014 that put down a strong marker for the country by achieving the lowest coupon on an AT1 — 5.5% — with a $1bn perpetual non-call five tranche that came alongside a 6.125% perpetual non-call 10, as $10bn aggregate of orders were placed.
“We are very happy with the coupon, which was the lowest ever,” said Rodney Alfvén, head of investor relations at Nordea. “Also the spreads were very attractive.”
Meanwhile Skandinaviska Enskilda Banken (SEB) in November filled out supply from the country’s four largest banks with a $1.1bn debut, making overall Swedish supply some $5.65bn.
The slew of issuance has been attributed to the Swedish authorities’ advanced and demanding move to the new post-crisis capital framework.
“We believe AT1 securities will be attractive for Swedish banks because Sweden adopted close to fully-loaded Basel III rules from 2014, ahead of most other European nations and well ahead of the mandated introduction schedule that allows a gradual move to Basel III by 2019,” said Daniel Forssen, associate analyst at Moody’s.
Meanwhile, the trigger for Swedish banks to start filling their AT1 buckets was the falling into place of the final pieces of the regulatory jigsaw governing their capital requirements and related AT1 rules.
“The regulatory environment was still changing until the back end of last year, both on the European level but particularly on the Swedish side” says Julian Burkhard, head of capital solutions, Crédit Agricole CIB. “Swedish FSA consultations on capital requirements and specifically on the Pillar 2 requirement continued throughout the summer of last year and were only confirmed in the fall.
“Nordea was then the first to advance, as expected, but there were still outstanding questions on topics such as BRRD implementation in Sweden and potential leverage ratio requirements, which is probably why you had a few banks waiting to have a better view on the regulatory context.”
AT1 jigsaw falls into place
Moody’s also noted that most Swedish banks’ legacy Tier 1 instruments do not qualify as Basel III capital and forecast that these would be replaced, and indeed this has been another factor in the timing of the inaugural AT1 supply.
John Arne Wang, head of treasury management at SEB, for example, explained that in its capital planning SEB had communicated that it planned to issue an AT1 before this summer, supplementing a strong CET1 capital ratio, with the bank having two legacy hybrid transactions that are callable this March equivalent to around Skr8bn (Eu865m, $1.08bn).
“Given our excellent ratios, we could obviously have waited longer than that, but ideally we like to take the opportunity of refinancing ahead of such calls,” he said. “So in that respect we were always looking to optimise the capital structure on that kind of a timescale, and once we had the clarity on CRD IV from the Swedish FSA we were able to move ahead.”
Another key factor in the timing of the Swedes’ deals has, of course been market conditions, which in the AT1 market have been variable, to say the least. SEB’s Wang noted that after the regulatory and redemption considerations, the issuer had the choice of moving ahead before the end of 2014 or issuing in the first half of 2015.
“After the rather substantial market volatility seen in the first half of October, we have had a remarkable rebound, not only in equity markets but also in credit, where volatility has steadily declined,” he said after the deal was launched on 6 November. “In connection with that we have seen an increased appetite from investors and also the kind of positive backdrop we were looking for that would enable us to achieve attractive levels.”
“There hadn’t been any European AT1 transactions since the Nordea transaction in September and it wasn’t obvious that was going to happen now, but we had several days with constructive market conditions spurred by the Japanese central bank and we felt fairly comfortable that throughout November there would be good opportunities. We also felt quite confident given the feedback from the market that investors would be open for business, with books not yet having started to close and indeed the rather dry period in the AT1 market having driven appetite higher, with significant cash to be put into action.”
SEB was able to reopen the AT1 market in successful fashion, pricing a $1.1bn perpetual non-call 5.5 issue with a coupon of 5.75% after having attracted $5.3bn of demand from over 360 accounts that helped the paper trade up in the aftermarket.
“I guess that’s exactly what the market was looking for: a reopening of the AT1 market post-AQR with a deal as well received as this one, showing performance in the secondary market and encouraging investors to buy more ahead of year-end,” said a syndicate official at one of the leads. “Let’s hope for more of the same.”
Swedbank shows Swedish sheen
For the Swedes, at least, further success arrived in the new year, although Swedbank and Handelsbanken waited until releasing their 2014 results before proceeding with their inaugural AT1 issues, Swedbank going first after announcing its plans on 6 February.
“We had been ready to issue an AT1 instrument for quite some time,” says Gregori Karamouzis, head of investor relations at Swedbank, “but we were not in a hurry as we have been filling the buffer requirement from the Swedish FSA with Common Equity Tier 1 capital. With the FSA finalising the capital requirement proposal last autumn, there was more clarity and you saw two of our peers move ahead back then, but they had more imminent needs whereas we don’t really have any needs until the end of this year.
“And then there was still an uncertainty around additional Pillar 2 individual requirements and the FSA, although not finalising these, gave a clear indication of what they intend to do in the winter.”
With the capital framework falling into place, the bank then worked on getting its documentation in order to be ready to issue soon after its Q4 results.
“When we published our numbers we then looked at the market and assessed that there was a good opportunity to go ahead and get our deal done,” says Karamouzis, “really for the purpose of optimising the capital structure. We want to fill our buffers with types of capital other than CET1, which is the most expensive form of capital.”
After a three day roadshow a perpetual non-call five issue was launched on 12 February.
“Despite the slightly softer market tone and large amounts of anticipated supply, we received phenomenal investor interest from the outset, with initial price thoughts of 5.75% for a size of $500m-$750m,” said a banker at one of the leads.
After orders quickly reached more than $2bn guidance was set at 5.5%-5.625% and a $750m issue was ultimately priced at 5.5% on the back of a $2.5bn book comprising over 200 accounts.
“There was minimal pricing sensitivity in when final terms were set at $750m at 5.5%,” said the lead banker, “offering only a very modest new issue premium, which stands in stark contrast to recent AT1 issues that paid concessions in the region of 30bp-50bp. The deal traded up to 100.50 on the break, demonstrating investors’ ongoing support for the issue in the secondary market.”
Unlike other Nordic AT1 issuance, Swedbank’s instrument included equity conversion rather than temporary write-down language.
“The equity conversion feedback was very positive and was considered as a cleaner structure and more favourable to investors,” said another lead banker. “Swedbank’s mechanism was by some considered to be worth approximately 25bp in terms of spread reduction relative to peers.”
He added that the level achieved by Swedbank was well through the secondaries of Nordea and SEB.
Swedbank CFO Göran Bronner said the issuer was very satisfied with the deal.
“Despite a turbulent market we successfully achieved a price at the same level as the lowest in the market for equivalent instruments,” he said. “This demonstrates Swedbank´s strong position and high confidence in the investor community.”
Alex Sönnerberg, Nordic FIG DCM origination at Crédit Agricole CIB, says that Swedish issuers across the board hold attractions for AT1 investors.
“They benefit from being much better quality than a lot of other European banks,” he says. “They have very high fully-loaded capital ratios and also announced very strong results. In line with this, they enjoy pretty strong ratings that on the whole put their AT1s in investment grade territory, and there’s not a lot of AT1s with IG ratings.
“Meanwhile, they have fairly limited requirements when it comes to filling their AT1 buckets — Swedbank, for example, said that they won’t be back for 2.5 years.”
Handelsbanken ‘museum piece’
The week after Swedbank debuted, Svenska Handelsbanken on 18 February launched its first AT1 and backed up these arguments. The announcement of Handelsbanken’s mandate came amid a wave of supply that included Swedbank’s AT1, but Bengt Edholm, head of treasury at Svenska Handelsbanken, says that the issuer was not concerned about this.
“We knew that for a very long time there has been demand for this type of product from Handelsbanken, so we didn’t really think about other issuers’ supply,” he says. “And everyone knows that we will not be a repeat issuer, that this will be a one-off, so that it would be sort of a museum piece when we came.
“$1.2bn of AT1 is beneficial in the capital structure, so it makes sense to do such an issue at some point in time. Our overall view is that we want to combine the lowest risk with best in class capitalisation, and this transaction should be seen in that context.”
The $1.2bn perpetual non-call six deal attracted $4.7bn of demand from some 250 accounts, enabling the leads to tighten from initial price thoughts of the 5.5% area to a coupon of 5.25% — the lowest coupon on a US dollar AT1.
“This is 0.25% inside Swedbank’s initial pricing” noted Pascal Decque, financials credit analyst at Crédit Agricole CIB. “It is worth underlining that this is the first AT1 with three investment grade ratings, and with no further supply in the foreseeable future.
“Swedish banks are among the best capitalised banks in Europe — Handelsbanken has a CET1 ratio of 20.4% — and offer the best cushions for AT1 investors.”
Edholm says the issuer chose the dollar market because it provided a better level than euros, although he says that this also enabled the issuer to offer paper in a currency that more of its regular investors can buy.
“The target was to issue tighter than anyone else,” says Edholm, “and that’s always our aim when we go out in the market because we have the strongest credit metrics, we are the most stable bank, we have managed through the financial crisis with an annual growth in equity and dividends of 15%, very stable quarter by quarter, we have the lowest loan losses, etc, etc. And of course when you print an AT1 that difference is expected to be much, much bigger than when you print a covered bond.
“And we achieved this with a very broad margin, so we were very happy with the price. But when we go out to the market — whether it be with a covered bond or an AT1 — it is also very important that the investors get a good performance in the bonds, and that was the case here, too.”
SBAB finds local favour
SBAB was also pleased with its result when it debuted in the AT1 market on 9 March with a Skr1.5bn of perpetual non-call five notes split into fixed and floating rate tranches that were priced just 15bp wider than where Nordea had the previous week issued krona AT1.
“It’s been a while since we last issued this type of instrument,” says Fredrik Jönsson, head of treasury at SBAB. “We have some old hybrids in place, but they are being grandfathered and under that treatment become less efficient every year.
“And with the new regulatory landscape that we and every other bank is facing there is room for issuing these AT1 instruments, so it is efficient from a regulatory perspective to have these on our balance sheet.”
The bank has Skr2bn of old hybrids coming up for call in June.
After a roadshow the issuer attracted some Skr4bn of demand and on the back of this the leads were able to tighten pricing from initial price thoughts of the 350bp over Stibor area to a re-offer spread of 325bp over. The transaction was split into Skr1.1bn of floating rate notes and Skr400m of fixed, reflecting the respective levels of demand.
The spread was only 15bp outside a 310bp level achieved by Nordea in Swedish kronor.
“All in all we are very pleased with the result,” says Jönsson. “15bp is not that much in this kind of transaction and that’s the ultimate proof that investors are very comfortable with an SBAB AT1 offering.”
Under the Swedish FSA’s latest Pillar 2 requirements announced on 17 February, SBAB has a required CET1 ratio of 21%, higher than those of the big four Swedish banks, and also the highest CET1 ratio, at 29.8%. The high requirement is driven by a 25% mortgage risk weight floor in Sweden that accounts for 11.7 points of SBAB’s Pillar 2 requirement. Jönsson notes that this means SBAB’s AT1 has the largest buffer to estimated MDA restrictions of any AT1, 21.8 points, while it has a buffer to the 7% group-level CET1 trigger of 22.8 points (the AT1 also has a 5.125% bank-level trigger).
“We have been looked at as a very safe option even though we have an expected rated from S&P of BB+ compared with the investment grade ratings of other Swedish banks’ AT1s,” he says. “There has not been that much AT1 supply Swedish krona and we had more than 40 different accounts in our order book.”
Until the Nordea trade — which also incorporated US dollar and Norwegian krone tranches — AT1 issuance from Sweden had been restricted to the dollar market for the reasons outlined by Handelsbanken’s Edholm.
“The major Swedish banks have been out there and issued in dollars, but we, a smaller bank, issued in Swedish kronor for a few reasons,” says Jönsson. “First of all, our size ambitions: you can, of course, do a sub-benchmark in dollars, but for a proper benchmark you need $500m-plus.
The Skr1.5bn total size of SBAB’s deal was equivalent to $177m.
“Another thing,” adds Jönsson, “is that our lending is in Swedish kronor, so it is more natural for us to issue in our domestic currency compared with the big banks – they of course also have lending in Swedish kronor, but they also have lending in euros and in dollars.
“And finally Swedish kronor is our major funding currency and it is important for us to give our domestic investor base an opportunity to buy our AT1 in their preferred currency.”
DNB flies Norwegian flag
Norway’s DNB likewise demonstrated enthusiasm from its domestic investors for the instrument when on 13 February it sold the first public AT1 from the country, a Nkr2.15bn (Eu247m, $264m) perpetual non-call five issue paying three month Nibor plus 325bp. According to Thor Tellefsen, senior vice president and head of long term funding at DNB, around 125 investors participated in the transaction.
“A huge part of the Norwegian investor community participated,” he says, “but not all have lines for these instruments yet.”
Some 60% of the paper was placed in Norway, while almost 20% was sold to Sweden and the remainder to other international investors.
“Our capital is in Norwegian kroner so obviously if we could fill all our needs in Norwegian kroner we should do that,” he says. “It was therefore a natural place to start but, as the Norwegian market isn’t that big, we could see how much we could get and then fill up the remaining needs with other currencies.”
The transaction turned out larger than expected, according to Tellefsen, and also achieved an attractive level for the issuer, with DNB coming 25bp-40bp inside where Swedbank had tapped the dollar market the previous day based on estimates as to where that would have swapped into Norwegian kroner. The floating rate format also suited both DNB and Norwegian investors, adds Tellefsen.
DNB has one legacy Tier 1 issue outstanding after having redeemed two in 2012 and 2013 that were not refinanced at the time.
“For a long time we have had much more core Tier 1 than we needed,” says Tellefsen, “but as the requirements for core Tier 1 are increasing we also need to fill up the Additional Tier 1 buckets. We were also waiting for the new criteria to be confirmed because when they were redeemed we didn’t know what the requirements would be.”
DNB followed up its krone issue with a $750m (Nkr6.12bn) 5.75% perpetual non-call five AT1 on 19 March that attracted $2bn of orders, although the transaction hit a weak market and the book and level were off the highs experienced by DNB’s Swedish peers.
Danish AT1 fills out
Danske Bank — which had opened the Nordic AT1 market in March 2014 — also faced a weak market when it sold a Eu750m perpetual non-call seven issue on 11 February, in the midst of the Swedish debuts and amid a bout of wider AT1 issuance. The Danish bank’s deal came after it announced its latest results.
“We then saw several other issuers with the same idea and so there was a little bit more traffic than we had perhaps anticipated,” says Peter Holm, senior vice president, group treasury, Danske Bank. “But we listened to our leads and stood by our initial plan.
“Since we had been on the road in Europe last year we thought that it was unnecessary to do so again, but rather hold a global conference call with investors and some one-on-ones the day before launch. We had some 80 participants on the call and this proved to be the right strategy.”
Danske’s leads went out with IPTs of the 6% area and, in spite of a weaker market backdrop of underperforming recent supply, built a book of over Eu2bn comprising some 200 accounts and priced the deal with a coupon of 5.875%.
Holm nevertheless notes how the book size contrasted with that of its inaugural AT1 in March 2014 and said that this reflected the way the market has changed in the interim.
“When we went out at that time there were not many issuers able to tap the market, but there was a lot of interest in the product and we had a tremendously large book of close to Eu13bn, with some 700 investors,” he says. “Since then we have seen what I would call a normalisation of the market.
“Particularly in the latter part of last year there were some hiccups in the market and, although the market recovered somewhat in January, we have not seen these huge order books that we saw at the beginning of 2014. We ended up with a little over Eu2bn this time, but we had the right investors in the deal for the right size and the right price, and overall we got a good result.”
Alongside its results, Danske announced an increased dividend of Dkr5.5 per share and a Dkr5bn share buyback for 2015. It has also announced it will be calling a Eu700m Tier 2 issue in March.
“We have been adjusting to the new regime for capital instruments under CRR/CRD IV and this issue continues that process,” says Holm. “The starting point is that we have a very strong capital position and in issuing the new Eu750m AT1 and repaying the Eu700m of Tier 2 we are increasing the quality of our capital base — although it should also be seen in the context of the share buyback.”
Danske was the following week joined by fellow Dane Nykredit, which on 19 February sold a Eu500m (Dkr3.72bn) 6.25% perpetual non-call 5.7 debut. Ahead of the deal Nykredit announced its plan alongside the redemption of Eu900m of outstanding hybrid Tier 1 on 1 April, and then held a three day roadshow. Its leads then went out with IPTs of the 6.5% area for the Eu500m no-grow deal and ultimately set the coupon at 6.25% on the back of Eu1.3bn of orders from 126 accounts.
A banker at one of the leads said that the roadshow and deal had substantially expanded Nykredit’s investor following, while another market participant noted that the issuer had, in contrast with Danske, been able to tighten pricing from IPTs.
“The performance has been seen as positive in spite of our name not being that well known in the AT1 market,” says Erik Holbek, senior investor relations manager at Nykredit. “With this issue we have nearly filled up our whole bucket for AT1 issuance, so we will not be back in the market in the near future — it will depend on how the business develops — and we understand that helped appetite for our issue.”