Denmark: Danske opens SNP

The differing business models of Danish banking groups have resulted in a matrix of evolving bail-in regulation. But since the country’s MREL and senior non-preferred debt framework was firmed up in March, issuers have been able to plan more definitively, with Danske Bank successfully opening the Danish SNP market on 14 May. Neil Day reports.

Copenhagen Guillaume Baviere Flickr

Finanstilsynet, the Danish FSA, announced MREL requirements and resolution plans for Danske, Jyske Bank and Sydbank on 26 March. The overall MREL requirement for systemically important financial institutions (SIFIs) was set at twice the solvency requirement plus twice the combined buffer requirement, with the total requirement always constituting at least 8% of total liabilities and own funds.

A bill to introduce senior non-preferred and give banks a statutory instrument to help meet these requirements was then passed and came into force on 1 July.

“We think the Danish legislative bodies have found a very good statutory solution for Denmark, allowing Danish banks to issue non-preferred senior notes,” says Bent Callisen, head of group funding at Danske. “The new Danish legislation effectively creates a new class of unsubordinated debt, non-preferred senior, which is positioned between the old senior and Tier 2s.

“In our view that resembles what we have seen elsewhere in Europe.”

However, he notes that the MREL requirement — which is equivalent to 33% of risk-weighted exposures for Danske — is relatively high in a European context.

“In fact we may have one of the highest requirements in Europe,” adds Callisen, “and because of that we will have to replace basically all of our preferred senior with the new non-preferred senior instrument. Looking at the balance sheet right now, we will not be issuing preferred senior in the foreseeable future, but only non-preferred.”

The bank has put its estimated senior non-preferred needs at around DKK100bn (EUR13.4bn), based on its 2017 balance sheet. Old-style outstanding senior preferred bonds will be grandfathered and count towards MREL requirements when they become effective on 1 July 2019 until the end of 2021.

Alpesh Varsani, director, DCM solutions and advisory at Crédit Agricole CIB, notes that the Danish framework stipulates that the SIFIs must fulfil their MREL requirements fully with subordinated instruments by January 2022. However, the ongoing Trilogue negotiations regarding the “risk reduction measures” legislative package being considered at an EU level may eventually limit the ability of national authorities to demand that MREL requirements be met fully with subordinated instruments and completely exclude senior preferred debt and other liabilities pari passu with senior preferred debt.

“The outcome of the Trilogue negotiations will be followed closely over the coming months, and some national regulators will be hoping to see some scope for national discretion in the final package,” he says.

Danske’s Callisen says he hopes that if and when there is further clarity on a European level the FSA will follow this lead and put the Danish banks on a level playing field.

Danske opens Danish market

Denmark’s legislation, although coming into force on 1 July, was effective retroactively from 1 January 2018, easing the way for banks to begin building up their buffers before July once they had amended their documentation. And Danske on 30 April announced the mandate for its first senior non-preferred transaction, targeting a five year euro benchmark.

It then approached the market on 14 May with its debut, rated Baa1/A-/A by Moody’s, S&P and Fitch (relative to issuer ratings of A1/A/A).

After initial price thoughts of the 65bp over mid-swaps area, guidance was set at the 55bp area, plus or minus 2bp will price within range, on the back of more than EUR2bn of demand. A EUR1.25bn (DKK9.31bn) five year deal was ultimately priced at 53bp over, with around EUR2.8bn of orders good at re-offer.

“Investors received us incredibly well,” says Callisen (pictured below). “They had no concerns about the format. As we see it, it was only a question of relative value, and we think investors were pleased to have the opportunity to buy a Nordic senior unsecured note with a bit of extra spread.

“We had more than 200 investors in the book, putting in close to EUR3bn of orders. It’s one of the best books we’ve had recently.”

Bent Callisen Danske

The execution process involved a degree of price discovery given the novelty of the product.

“There are multiple ways of looking at pricing,” says Callisen. “One is to compare with similar banks, but there wasn’t a true comparable given that we were the first Nordic out there. The other way would be to look at non-preferred as part of the Tier 2 spread.

“Investors formed their opinion based on those and potential other reference points before deciding what the right price was. The eventual pricing of 53bp was roughly in line with where we had anticipated before going to the market.”

George Kalbin, director, FI syndicate at Crédit Agricole CIB, puts the new issue concession paid by Danske at around 10bp, based on a theoretical spread between preferred and non-preferred senior, and says this is in line with the average paid on similar issues throughout the year.

“All in all still a very successful trade,” he says. “They got a book of some EUR2.8bn and took out a chunky EUR1.25bn, so clearly generated a lot of interest and opted for size.”

The week after its debut, Danske on 18 May launched a SEK 4.25bn (EUR407m, DKK3.03bn) senior non-preferred issue split into fixed and floating rate tranches and priced at 73bp over the respective benchmark rates.

Then on 5 June it made its senior non-preferred debut in the US dollar market with a $1.75bn (DKK11.2bn, EUR1.50bn) triple tranche transaction split into $850m fixed and $400m floating rate 5.25 year tranches and a $500m 10 year fixed rate deal, priced at 120bp over Treasuries, 106bp over Libor and 148bp over Treasuries, respectively. The combined book totalled almost $4bn.

“Our experience in the Swedish and US dollar market in 144A format resembled that on the inaugural euro deal,” says Callisen.

The three deals mean Danske has already raised some DKK23.5bn (EUR3.16bn) of senior non-preferred debt. And on 20 June the bank went on to sell a $750m AT1.

“Normally we try to distribute the funding throughout the year,” says Callisen, “but this year we had to wait for the non-preferred senior legislation and hence we’ve issued a relatively large amount in the second quarter. We have a funding need this year of DKK60bn-DKK80bn and are more than halfway.

“The market has taught us once again that when conditions are stable and investor demand is there, we may as well issue, and that consideration was also what led us to issue our Additional Tier 1 now.”

When Nordea sold its inaugural senior non-preferred transaction, a EUR1bn five year, on 15 June, it paid 60bp over mid-swaps, illustrating the continuing widening of spreads that acted as a backdrop to Danske’s issuance (see News section for more on Nordea).

“Danske recognised that in these markets there is a first-mover advantage and effectively utilized that when a good market window opened up,” says Kalbin at CACIB. “They followed up with a highly-successful Swedish krona bond, to become the first Nordic issuer to utilise that market for senior non-preferred issuance, and then capitalised on the momentum they had in the US market as well.”

Nykredit needs rise on 8% rule

Standalone mortgage credit institutions, not being deposit-taking institutions, had been exempted from MREL, with the FSA instead making them subject to a “debt buffer” requirement of 2% of their mortgage assets.

Nykredit Realkredit begun building up this buffer in June 2016, with a EUR500m “senior resolution note” (SRN) that was deemed the first bail-in-type senior instrument — while also helping the issuer’s ratings. The instrument was structured to contractually fit correctly into the creditor hierarchy, and also taken up by the smaller DLR Kredit.

However, Danmarks Nationalbank, the Danish central bank, had suggested that the mortgage credit institutions should have a bigger buffer, while there were concerns that unless they had 8% bail-in-able liabilities they would not qualify for the resolution fund. And in the same legislation introducing Denmark’s senior non-preferred instrument, a new requirement was introduced that for SIFI mortgage credit institutions that are not part of a group, the debt buffer must be above 2% and the sum of the institution’s capital requirement and debt buffer requirement must be above 8% of the institution’s total liabilities. For mortgage credit institutions that are part of a group, the 8% requirement is applicable on a group level.

According to Morten Bækmand Nielsen, head of investor relations at Nykredit (pictured below), the introduction of the 8% requirement means the issuer will require some DKK20bn-DKK30bn more of senior non-preferred issuance, with its related costs.

“It was expensive news,” he says. “We were of course a little bit disappointed that, having at first been exempt from MREL, we still saw our requirements for bail-in-able debt increase.”

Baekmand Nielsen Morten New

Nykredit’s EUR1.8bn of outstanding senior resolution notes will now convert into the new statutory senior non-preferred Danish instrument that has been introduced thanks to an alignment clause in their documentation.

The issuer has given guidance that it expects to raise up to DKK5bn of new senior non-preferred debt by year-end and, as with its SRNs, will focus on euros.

“Given that we know this is an instrument we know we are going to be consistently issuing, we have been eager to build up a curve in order to make sure that we have something to price off,” says Nielsen, “and we have been quite open with investors about our plans.”

Nykredit has already begun meeting with investors in non-deal related roadshowing to prepare the ground for its first issuance since the legislation was introduced.

Jyske set for SNP from autumn

Jyske Bank is also eyeing its first senior non-preferred issuance in the second half of the year.

The bank’s MREL requirement is equivalent to 28.1% of risk-weighted exposures and, according to Jyske’s calculations, it already meets the 8% bail-in-able liabilities requirement thanks to the grandfathering of outstanding senior preferred issued before the beginning of this year.

Indeed the bank sold a EUR500m five year old-style senior bond in November just before the cut-off date.

“We did a second senior preferred issue in 2017 in order to be able to include it in our MREL requirement until the end of 2021,” says Merete Poller Novak, head of debt investor relations and capital markets funding at Jyske Bank, “and we were able to achieve extraordinarily tight pricing on that.”

The issuer will now be replacing its stock of senior preferred debt ahead of 1 January 2022 by which time MREL requirements must be met with only subordinated instruments, with an estimated EUR2bn-EUR2.5bn to be raised in aggregate by the deadline.

“We are in no hurry to issue our first senior non-preferred,” says Novak. “But we would like to issue during the window from September to year-end, as we have a positive outlook on our senior preferred short and long term ratings [A- and A-2] from S&P based on the assumption that there will be this gradual build-up of our MREL that we have communicated.

“Furthermore, we consider it of very high strategic importance for our long term investor recognition to show our name in the euro primary market at least once a year.”

S&P revised its outlook on the ratings of Danske Bank (A/A-1) and Jyske Bank to positive on April 5, in the wake of the Danish FSA announcing their MREL requirements.

“We anticipate that Danske Bank and Jyske Bank will replace significant portions of maturing senior unsecured debt with senior non-preferred debt from mid-year 2018,” it said, “thereby accumulating a material amount of ALAC capacity.”

Novak notes that any upgrade would be positive for the bank even if it will not be issuing much senior preferred debt, with any improvement in its short term rating helping in derivatives and commercial paper, for example. The extent to which Jyske might issue senior preferred depends on several factors.

“It’s a question of how the balance sheet develops, if bank lending and deposits stay the same or change, and if the growth is in mortgage lending only or bank lending will grow, too,” says Novak. “If we just need something from a pure NSFR or S&P SFR perspective, then we will top up with senior preferred because it’s cheaper.

“And then we don’t know just how the regulations will ultimately end up, with this talk of TLAC-MREL harmonisation and the like.”