May 19 (Bloomberg) -- Danske Bank A/S and five other Danish lenders had their ratings cut by Moody’s Investors Service after the February failure of a regional bank triggered the European Union’s first senior creditor losses.
The financial strength ratings for five of the lenders was also downgraded by one step, reflecting Moody’s “assessment of the banks’ weakened intrinsic strength,” it said in a statement today. Danske Bank had its financial strength rating affirmed.
The Feb. 6 failure of Amagerbanken A/S forced a 41 percent loss on unsecured senior bonds and prompted Moody’s 10 days later to cut ratings on five Danish lenders, including Danske, 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.
Amagerbanken’s resolution “clarified that the Danish government would favor market solutions in future bank bailouts,” Moody’s said.
“We’ve seen some evidence that funding costs are rising, but we see this more as a long-term issue,” Moody’s analyst Oscar Heemskerk said by phone today. “It could lead to foreign investors scrutinizing Danish banks more, making funding more difficult to obtain and more expensive.”
Moody’s today cut the long-term ratings and financial strength ratings of Jyske Bank A/S, Sydbank A/S, Spar Nord Bank A/S, Ringkjoebing Landbobank A/S and BankNordik P/F, it said.
The cost of insuring against losses on senior five-year notes issued by Danske Bank is almost twice that of guarding against losses on same-maturity notes sold by Stockholm-based Nordea Bank AB. Credit default swaps on Danske Bank’s debt traded at 109 basis points yesterday, compared with 65.5 on Nordea’s notes, according to Bloomberg data.
“Danske Bank was downgraded due to less systemic support,” Heemskerk said. “The bank’s underlying issues persist, which is why we’ve kept the outlook negative.”
BankNordik, based in the Faroe Islands capital of Torshavn, late yesterday said it agreed to buy the healthy parts of Amagerbanken for a net goodwill fee of 235 million kroner ($45 million) from Denmark’s state-backed winding-down unit Financial Stability. BankNordik will also receive as much as 300 million kroner in equity as part of the agreement, it said.
Danish lawmakers on May 13 started debating a proposal from Economy Minister Brian Mikkelsen that will make it easier to sidestep Europe’s toughest winding-down rules. The bill would promote consolidation by allowing healthy banks to tap cash in the country’s depositor guarantee fund to finance acquisitions of troubled lenders.
The move could help Denmark weather any funding disruptions that may yet hit the country while it waits for others in the region to copy its model. According to Jesper Berg, senior vice president at Nykredit A/S, as long as Denmark is an outlier with its bail-in precedent, its banks face a potentially inhospitable funding environment.
“The impact of Amagerbanken on the funding situation of Danish banks was not helpful,” Berg said in an interview last week. “Denmark is still ahead in Europe in its implementation of bank resolution schemes at a time when financial markets are very nervous about these. Other countries will follow, but until then, Danish banks will have a funding disadvantage.”
Moody’s expects that “over time, the Danish authorities will continue to develop the necessary legal and regulatory tools to enable the practical application of bail-in procedures even to large banks,” the rating company said in the statement.
“We’ve taken a big step back to a situation without a general state guarantee, requiring banks to stand on their own feet without economic support from the state,” Economy Minister Brian Mikkelsen said in a statement today. “This also requires that the bank industry prepare itself for the change.”
Danske Bank, Jyske Bank and Sydbank had their long-term grades cut to A2 from A1, Moody’s said. Spar Nord Bank and BankNordik had their ratings lowered to Baa2 from Baa1, it said. Ringkjoebing Landbobank had its rating cut to A3 from A2.
“It’s a priority for the government to have common European rules for the handling of troubled banks,” Mikkelsen said. “We’re expecting a proposal from the European Commission, which is due to come in September at the latest.”
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