Jyske champions callables after Nordic SNP first

Jyske Bank issued the first callable senior non-preferred transaction from the Nordics on 13 June, a EUR500m five year non-call four transaction launched as BRRD2 was coming into force, with more issuers potentially adopting such structures should the EBA deem them appropriate.

To fulfil TLAC and/or MREL requirements, issuance of callable HoldCo debt from banks in the US, UK and Switzerland has become commonplace, with the structure allowing banks to refinance the debt a year before maturity, when it would otherwise lose its regulatory benefit and become unnecessarily expensive.

But banks in the EU have typically refrained from issuing similar callable debt in senior non-preferred or HoldCo format to meet TLAC and MREL requirements in the absence of regulatory clarity over whether such structures could be deemed to have an incentive to call and therefore be disallowed. BNP Paribas nevertheless pioneered the structure among EU banks and others, such as UniCredit and AIB, have taken advantage of it.

Jyske became the first Nordic bank to do so on 13 June and Merete Poller Novak, head of debt investor relations and capital markets funding in Jyske Bank group treasury, said that BRRD — which was passed on 7 June and came into force on 27 June with the wider EU Banking Package — has removed any obstacles to the callable structure.

“At Jyske, we don’t understand why more issuers aren’t going for the callable format,” she said, “because it’s much more efficient from an MREL cost perspective. If you go back to when we issued our first SNP in November 2018, there was still some regulatory uncertainty around it, but with BRRD2 it is now allowed and the Danish regulator has confirmed that callables are fine.

“So, if the market allows us to issue callables at a reasonable premium, we are just going to be issuing callables for our non-preferred senior needs from now on”

Jyske’s EUR500m five non-call four issue was priced at 95bp over mid-swaps on the back of a book that peaked above EUR1bn, following initial price thoughts of the 110bp area and guidance of 95bp-100bp.

According to a banker at one of the leads, the pricing implied 7bp-8bp of combined new issue premium and call premium versus a five year trade. Novak said the benefit of being able to call the issue after four years clearly outweighs the call premium versus the alternative, a five year bullet — although she acknowledged that this might not be the case for issuers trading at tighter levels.

“And if you just used bullets, you would always have to refinance one year before maturity to maintain your MREL position, so you would have a higher stock outstanding,” she said.

Novak said that investors, meanwhile, achieve a pick-up over what they would receive for a four year note. However, she noted that callable structures are not yet to all investors’ tastes, with some German investors, for example, not buying them.

“Everything else being equal, there is no doubt the order book would have been bigger if we had done a bullet,” she said. “But for our needs, the demand is large enough for us to achieve a good trade and a good price — we don’t necessarily need EUR2bn order books.”

Over 80 accounts participated in the deal, with 26% going to Germany and Austria, 22% to Denmark, 19% to other Nordics, 16% to the UK and Ireland, 7% to southern Europe, 7% to France, and 3% elsewhere. Asset managers were allocated 65%, banks 22%, insurance companies and pension funds 7%, and official institutions 6%.

Apart from possible opportunistic niche transactions, in Swedish kronor, Jyske is not set to tap the market again, according to Novak. Next year it expects to launch two EUR500m senior non-preferred benchmarks, she said, one likely in the first quarter to build its MREL stack, and the other probably in the third or early fourth quarter to refinance a year ahead of maturity a EUR500m deal sold in November 2018. Five non-call four and six non-call five structures are most likely, she added, in order for the MREL debt not to be too short-dated.

George Kalbin, director, FI syndicate at Crédit Agricole CIB, said that, with the EBA likely to offer favourable guidance on callable structures for Eurozone banks by late 2019 or the beginning of 2020, more EU issuers could soon be adopting similar strategies.

“Danish banks have a green light from their regulator,” he said, “but even in the Eurozone we’re already seeing the likes of BNP Paribas and UniCredit issuing with calls. It’s a very efficient way for banks to manage their MREL requirements and I do expect this to increasingly become the norm.”