Nykredit to Refinance $2 Billion With Preferred Stock, CoCos

Nykredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, plans to refinance 11 billion kroner ($2 billion) using preferred stock and contingent convertible debt.

The securities will replace debt that’s coming due in 2014 and 2015, Chief Financial Officer Soeren Holm said yesterday in a telephone interview from Copenhagen. The closely held lender regards preferred stock as a “multi-purpose vehicle” to help it meet stricter capital requirements without accessing publicly traded stock markets, he said.

The plan marks a break from Nykredit’s 162-year history as a cooperative mortgage bank as it looks for ways to match the equity building capacity of its listed competitors. Nykredit is seeking government approval to issue preferred stock that existing legislation prevents it from selling, Holm said. The bank is expecting lawmakers to pass a bill as early as next year, he said. Once Nykredit can sell preferred stock, it will be free to issue notes that convert to equity, he said.

The European Parliament agreed to allow banks to include loss-absorbing debt instruments in their capital buffers to protect taxpayers. That’s driving issuance plans at banks as investors try to work out how to price the new securities. The world’s biggest banks are 140.6 billion euros ($191 billion) short of global equity and capital conservation standards, the Basel Committee on Banking Supervision said last month.

Capital Shortfall

Nykredit, which dates back to 1851, is short about 11.4 billion kroner to fulfill its estimated 2019 equity requirement of 70 billion kroner. It had equity of 58.6 billion kroner as of June 30, the bank said in its second-quarter earnings report.

If lending increases by 2 percent annually, the requirement will climb to 76 billion kroner, leaving the bank with 17.4 billion-krone equity shortfall, it said. Nykredit also expects to have at least 15 billion kroner in subordinated debt.

Denmark’s Systemic Risk Council said Sept. 26 it will examine “behavioral changes” at banks triggered by higher capital requirements. Though down since 2009, lending remains at a high level seen from a historical perspective, the council said. Results of the board’s probe may come as early as December, it said.

Ownership Structure

The bank’s ownership structure -- its main shareholder is a cooperative owned by borrowers -- prevents it from issuing shares and as a consequence from deploying hybrid, or contingent convertible, debt that converts into equity.

Without the option, the bank may not be able to support economic growth in Denmark, Chief Executive Officer Michael Rasmussen said in an interview last week.

While its first aim is to generate enough profit to meet capital requirements, “if you look at our earnings forecast, if we meet the capital requirements, there isn’t room for growth, Rasmussen said.

“We’re not coming hat in hand and asking for something” of the Danish parliament, he said.

Danske Bank A/S on Oct. 1 raised its forecast for economic growth this year to 0.3 percent and maintained its 2014 forecast for 1.5 percent expansion, citing accelerating exports, investments and consumer spending. Central Bank Governor Lars Rohde warned last week against fiscal easing, saying it may backfire and put pressure on the labor market just as the economy recovers from dual housing and bank crises.

CoCo Confusion

“Either we have access to capital or we may have to just say that we cannot follow the growth,” Rasmussen said. “If it gets really bad, we may have to shrink lending.”

The new shares would probably pay a dividend and have no voting rights, Holm said. Whether the bank issues hybrid debt will depend on lending growth and the levels Denmark sets for when the debt converts to equity. Investors probably will include existing corporate and high-wealth customers, he said.

Nykredit’s total capital requirement will rise from 9.5 percent to about 18 percent by 2019 as new rules increase risk-weighted assets and regulators demand higher buffers, the bank said in August. Risk-weighted assets will increase to 415 billion kroner, from 316 billion kroner, the bank said.

Nykredit could raise capital by issuing Tier 2 debt that is written down when a threshold is breached. The bank would rather save that option, because European legislation puts limits on the amount of that type of instrument an issuer can sell, Holm said.

‘It’s Cheaper’

“For us, it’s 15 billion kroner,” Holm said. “We can start replacing the 11 billion with Tier 2 debt -- it is cheaper -- but when you hit the limit, you have to do something else.”

Though pressed for capital, banks have largely steered clear of CoCos, citing uncertain regulatory, tax and rating company treatment. Danske Bank redeemed yesterday almost $1 billion in loss-absorbing debt after Standard & Poor’s changed its assessment of the Tier 2 issue.

Nykredit isn’t taking the same chances. The bank won’t start issuing the securities until they’re approved by the Danish parliament, Holm said. Without preferred shares, the bank can’t compensate investors since the majority shareholder -- the Nykredit Association, which represents borrowers -- is unlikely to agree to a dividend, he said. Banks, unlike industrial companies such as A.P. Moeller-Maersk A/S, aren’t currently allowed under Danish law to offer the stock, he said.

Business Minister Henrik Sass Larsen said in a Sept. 26 speech to the Association of Danish Mortgage Banks that “a solution” will be found to help mortgage banks.

After parliamentary approval, the bank will need the go-ahead from its association, which holds about 90 percent of the bank, Holm said. That process may take as long as a year.

“Whether or not we issue new shares, it can still be used as an instrument for a hybrid to convert into, which makes it easier to issue hybrids,” Holm said. “There is no big lending demand now but that will change. I don’t think we’ll have no to low growth forever.”

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