Danish Banks Fight Debt Triggers They Say Will Kill Lending

Denmark’s biggest banks are seeking to prevent a proposal aimed at safeguarding taxpayers against bail-outs, arguing it will force them to tap more expensive equity to fulfill capital requirements and limit their ability to make loans.

As part of the plan, the government has set a trigger for converting debt to equity so high that investors will demand an equally high return, forcing lenders to raise costlier equity, said Steen Nygaard, head of group treasury at Jyske Bank A/S, Denmark’s second-largest listed lender.

“Under the worst case scenario, if we can’t issue anything at terms attractive to us, we would need to have at least 15 percent in core equity,” Nygaard said. “That will mean a contraction in our ability to grant loans.”

Banks and mortgage lenders are urging Denmark to wait on setting triggers until the European Union puts its regulations in place. The Danish public had until last week to respond to recommendations aimed at preventing taxpayers from having to shoulder the cost of bank collapses from a committee on so-called systemically important financial institutions.

“If you put the triggers too high, the instruments may not be sellable,” Jesper Berg, senior vice president and head of regulatory affairs at Nykredit A/S, Denmark’s biggest issuer of covered bonds. “Investors will fear they can quickly go from something where the interest is paid to not paid or converted.”

Double Standards

Lawmakers are looking at the measures with the intention of passing legislation later this year. Under the current proposal, debt would convert to equity when the underlying equity falls below 10.125 percent of risk-weighted assets.

That’s almost twice current Danish and EU levels and significantly higher than what Standard & Poor’s requires, said Jens Moeller, managing director in DLR Kredit A/S, which is seeking to become designated a Sifi. If the high trigger scares off investors and prevents banks from raising debt, equity investors probably will demand an even higher return, he said.

“Investors in equity will have the same view and will require at least as high a premium,” Moeller said. “This is our primary concern. The other things we can handle.”

The committee last month named six banks, including Danske Bank A/S, Nordea Bank AB, as too big to fail and advised they hold as much as 5 percent additional capital.

“We shouldn’t move the bar faster or higher than other EU countries,” Ane Arnth Jensen, head of the Association of Danish Mortgage Banks, said. “Some countries haven’t even decided what they’re going to do. We’re one of the fastest-moving countries trying to define this area. That seems unwise.”

Denmark became the first European country to force losses on senior creditors under a government framework when Amagerbanken A/S failed in 2011, a move that locked most Danish banks out of funding markets. Just months earlier, parliament had passed bail-in legislation Europe was expected to adopt. The EU faces a self-imposed June deadline for similar plans.

“Often it is better, if you have to decide on a trigger, to follow the market standard,” Jensen said. “But there is not market standard. So Denmark should wait.”

(Updates with industry group comment in 10th paragraph.)
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