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Nykredit May Boost Capital Buffers With Hybrid Securities

CoCo-Like Notes on Nykredit List of Capital Boosting Aids
The headquarters of Nykredit A/S stand in Copenhagen. Photographer: Ulrik Jantzen/Bloomberg

Nykredit A/S, Europe’s biggest issuer of covered bonds backed by mortgages, is looking into a range of hybrid securities that mimic the behavior of contingent convertible bonds to help boost its capital buffers.

Nykredit will need to set aside 70 billion kroner ($12 billion) in capital to meet Basel Committee on Banking Supervision requirements that are due to become binding by 2019, Chief Executive Officer Peter Engberg Jensen said. That’s an increase of 32 percent compared with reported capital at the end of the third quarter.

“If we’re going to grow our balance sheet, we’ll need to increase earnings, or there’s the option to use capital instruments suited to us,” Jensen, whose office is based in Copenhagen, said in a telephone interview yesterday. Though the closely-held lender can’t issue contingent convertible bonds, which convert into traded shares at a given trigger, “we’re looking at capital that would be as good as equity, but isn’t, and that can be used for an unlisted company like ours,” he said.

Bonds that convert into equity, allowing banks to boost capital when they need it most, have emerged as a way for some of Europe’s biggest lenders to meet stricter regulatory standards. In neighboring Sweden, Finance Minister Anders Borg has encouraged the nation’s largest lenders to use so-called CoCos to comply with stricter Swedish standards. Denmark’s central bank said last year it’s open to letting the Nordic country’s biggest banks resort to CoCos or their equivalents.

Covered Bonds

Nykredit’s main shareholder is the Nykredit Trust, which is mutually owned by borrowers. The bank’s minority owners include a number of smaller trusts and funds.

“We’re targeting the relationship between equity and hybrid capital, as we have to refinance some notes in a few years, but we’re generally looking at a number of different capital instruments,” Jensen said. “Our main capital generation will come from earnings, by far.”

Nykredit yesterday posted profit before tax of 3.2 billion kroner for the first nine months, more than double the 1.3 billion kroner reported a year earlier. Though impairments rose 71 percent to 1.5 billion kroner in the period, profit was helped by a surge in investment income to 2.3 billion kroner, from only 53 million kroner a year earlier, the bank said.

Spreads Tightening

The lender’s investments were boosted by a tightening of spreads on covered bonds, it said.

Jensen said bond markets recovered after European Central Bank President Mario Draghi in September unveiled his Outright Monetary Transactions program, offering a backstop to the euro-zone’s bond markets.

Nykredit had bought covered bonds issued out of France, Sweden, Denmark and the U.K., Jensen said. Other large investors have also bet on gains in covered bonds. Norway’s $660 billion sovereign wealth fund, the world’s biggest, said Nov. 2 it increased its holdings of the securities and cut down on senior debt issued by Europe’s banks amid a tougher regulatory environment.

Lenders issuing in Europe’s single currency had sold less than 10 billion euros ($13 billion) in covered bonds in September, about half the amount sold in senior unsecured debt, according to Norway’s wealth fund. That compares with covered-bond issuance of more than 25 billion euros in January, according to the investor’s third-quarter report.

“The market has become normal after we bet that spreads had widened too much,” Jensen said. “Investor confidence has risen as Draghi intervened, also in corporate bonds, and we’ve made money on that.”

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