Denmark’s decision to force bank bondholders to share losses risks turning the country into an “outlier” in Europe as lenders prepare to tap funding markets, said Danske Bank A/S Chief Executive Officer Peter Straarup.
“There is a risk that it puts a small blemish on Denmark,” Straarup said in an April 6 interview from Copenhagen. Burden sharing “is something that has to be put in place in Europe in general. It’s my hope that the Danish situation is not an outlier situation, but something that is more of a general norm in the European universe.”
The Feb. 6 failure of Amagerbanken A/S forced a 41 percent loss on unsecured senior bonds and prompted Moody’s Investors Service 10 days later to cut ratings on five Danish lenders, including Danske Bank, as it factored out state protection. The insolvency was the first to test rules Denmark put in place in October and set a European Union precedent for senior creditor losses amid a region-wide debate on burden sharing.
Danske Bank hasn’t seen any “material change” in the short-term funding market, Straarup said. The bank didn’t tap long-term debt markets last quarter. “We are sticking to our funding plan,” he said.
Danske Bank yesterday said it sold $1.75 billion in three-and five-year notes. The sale included $500 million in notes due 2014 with a floating coupon and a 105-basis-point spread over three-month Libor. The bank also sold $1.25 billion in five-year notes with a 3.875 coupon with a 160-basis-point spread over comparable-maturity Treasuries.
The bank booked net proceeds of 19.8 billion kroner ($3.8 billion) after selling 232.9 million new shares, it said on April 6.
“The problem for Denmark is that we are left standing alone for the moment,” said Claus Jensen, an analyst at ABG Sundal Collier in Copenhagen. “There is a risk investors will start looking to other countries where there is less of a chance of losing their money. The big banks here can still get funding at a slight premium, but the smaller banks are having difficulty. The situation isn’t sustainable.”
Spar Nord Bank A/S, Denmark’s fourth-largest lender, dropped plans to sell bonds in February after Amagerbanken’s collapse, said Ole Madsen, the bank’s communications director, in a phone interview today.
“We’re comfortably funded for the next 12 months but do plan to test markets later this quarter, though we don’t know whether we’ll pursue an international bond issue,” he said. “It’s worrying if funding is drying up and there’s no solution to this problem.”
Lobbying for Support
Danske Bank shares, which have declined 5.4 percent this year, were trading 2.96 percent higher at 125.20 kroner at 3:08 p.m. in Copenhagen.
Denmark is trying to persuade the rest of Europe to match its bail-in rules to avoid having its bank industry punished by higher funding costs.
“The EU ought to think very seriously about this,” said Thomas Broeng Joergensen, acting director of international financial affairs at the Financial Supervisory Authority, in a March 20 e-mail. “A level playing field in Europe is crucial for ensuring an effective, transparent single market.”
A permanent European crisis-handling mechanism due to come into force in 2013 will include provisions for bondholder losses on a case-by-case basis in line with International Monetary Fund practices.
The failure of Amagerbanken, which was Denmark’s fifth-largest listed bank, will trigger a wave of consolidation as small banks struggling to raise funds get absorbed by bigger rivals, said Ulrik Noedgaard, FSA director, in a March 4 interview.
The Nordic country opted for Europe’s toughest bank rescue mechanism even though it was clear “that one of the consequences of Denmark no longer securing all debt holders could be that financing costs would rise,” he said.