Nykredit Realkredit A/S said it will raise its capital buffer by one-third after Standard & Poor’s downgraded Europe’s largest mortgage bank, citing its thin shield for absorbing losses.
Nykredit will issue about 3 billion euros ($3.3 billion) in new securities over the next 24 months, according to Jesper Berg, head of regulatory affairs at the lender. About 1 billion euros will be Tier 2 securities and 2 billion euros will be bonds with similar characteristics, he said.
The surge in issuance would put Nykredit’s capital buffer above a minimum threshold set by S&P, which Monday cut the Danish lender’s counterparty rating to A from A+, with a negative outlook. S&P cited diminished government support and the “low” level of bail-in-able debt Nykredit currently holds.
Banks should hold additional capital, beyond minimum requirements, that is equal to at least 5 percent of risk-weighted assets as government support evaporates, according to S&P. Nykredit may struggle to meet that standard because of pressure on earnings and the “potential challenge” it faces selling so much debt, the ratings company said.
Nykredit will have to offer “sizable issues over the next two years,” Alexander Ekbom, a Stockholm-based analyst with S&P, said in an e-mailed response to questions on Monday.
Nykredit had Tier 1 and 2 capital of 63.6 billion kroner ($9.4 billion) at the end of March, according to its first-quarter report. Chief Financial Officer Soeren Holm said in May Nykredit probably would issue bonds to increase its so-called additional loss-absorbing capacity after S&P introduced the measure.
According to Berg, the bank’s issuance plans will put it on track to meet S&P’s requirements.
“The time-line for issuance is about two years,” Berg said by phone. “This brings Nykredit Realkredit just above the 5 percent.”
The low-rate environment may play in Nykredit’s favor. According to Fitch Ratings survey, investors aren’t put off by riskier bank debt. In the search for higher returns, 72 percent said they take a ‘highly selective’’ approach when buying the securities, and 12 percent said the extra yield makes any investment-grade issuer’s debt attractive, Fitch said July 14.
S&P in May put Nykredit on creditwatch negative after noting banks won’t get the same degree of government support they once enjoyed after the introduction of a new resolution framework for European lenders.
Monday’s downgrade of Nykredit was among several ratings actions on Danish banks by S&P, including an upgrade of Danske Bank A/S and DLR Kredit, which now have stable outlooks.
S&P said weighing in Danish banks’ favor is the progress Denmark has made in implementing bank resolution steps, including a requirement that mortgage banks by 2020 hold a buffer of 2 percent of non-risk-weighted assets. The framework means banks are likely to hold “sizable buffers of bail-in-able instruments in the coming years,” S&P said.
An upgrade of Nykredit’s outlook to stable would depend on the mortgage bank’s success in raising capital and less reliance on short-term funding, S&P said.