Swedish Banks Mull Joining $50 Billion CoCo Bond Boom

Swedish banks, the best capitalized in Europe, are weighing the sale of bonds with more rigorous triggers protecting against financial meltdown, a market in the region that has grown to $50 billion in about a year.

Swedbank AB is among lenders talking with the country’s regulator about contingent convertible Additional Tier 1 debt, which are written down or convert to equity if capital falls below a pre-set trigger. An acceptable level in Sweden for so-called AT1s could be 7 percent to 8 percent, according to Gregori Karamouzis, the head of investor relations at Swedbank.

“Swedbank is absolutely considering issuing AT1 securities,” Karamouzis said by telephone from Stockholm July 8. “We expect the Financial Supervisory Authority to finalize details around the capital requirements by August or September, and provide some guidance on the loss-absorption trigger.”

Sweden’s banks are facing higher triggers than lenders elsewhere in Europe amid talks on a wider context of risk and capital levels. The minimum writedown or conversion point is a common Equity Tier 1 capital ratio of 5.125 percent, according to European Union laws for implementing the Basel III framework.

SEB Looking

The EU-minimum “isn’t appropriate in the context of Sweden’s going-concern capital requirement,” Uldis Cerps, executive director at the Financial Supervisory Authority, said in a phone interview.

SEB AB would also consider issuing AT1 securities, Chief Executive Officer Annika Falkengren said in an interview today, after reporting second-quarter earnings that beat estimates.

The bank would contemplate AT1 bonds but needs “firmer rules” from the financial regulator on whether “it’s going to be core Tier 1 or not when we issue,” she said. “We need more guidance regarding some regulations.”

Sweden has imposed tougher standards on its banks than elsewhere to protect the largest Nordic economy. Sweden’s four biggest banks, which have combined balance sheets that are four times the nation’s output, will need to hold 14.5 percent to 19.3 percent in common equity Tier 1 capital of risk-weighted assets. That compares with a Basel III minimum target of 7 percent, due to take effect from 2019.

‘Clearly Deviate’

While AT1 triggers don’t require supervisory approval, details are being discussed as part of qualitative talks with the regulator.

For issuers such as Swedbank, it’s important that levels don’t deviate too much from elsewhere in Europe.

“A range of 9 to 10 percent would clearly deviate from the current 5.125 percent and 7 percent levels seen in other jurisdictions,” Karamouzis said.

Danske Bank A/S, the largest Danish bank, is so far the only issuer of AT1 securities in the Nordic region. It has a 7 percent CET1 trigger on its 750 million-euro 5.75 percent subordinated notes. The notes trade at about 3.8 percent over face value with a yield-to-next call of about 5.0 percent.

The regulatory framework is already in place for Nordea Bank AB, SEB AB, Svenska Handelsbanken AB and Swedbank to issue as much as 1.5 percent of their combined 2.9 trillion kronor ($428 billion) in risk-weighted assets.

Given their high capital levels there’s less urgency than elsewhere to sell contingent convertible notes. Sweden’s largest lenders have the four highest CET1 capital ratios under Basel III calculations, ranging from 14.6 percent to 18.9 percent, which compare to a 10.85 percent median for European banks, Bloomberg Industries data show.

Weaker Market

Swedbank is likely to wait for the other banks to go first to gain more accurate pricing, Karamouzis said. Spokesmen from the other three banks declined to comment.

Still, the longer the Swedish banks refrain from issuing AT1s the greater the risk that they have to sell into a weaker market. Potential risks include a negative reaction to the European Central Bank’s review of banks or an issuer suspending its AT1 payments. Spain’s Banco Popular Espanol SA on July 10 postponed a euro benchmark AT1 sale, citing market volatility.

“Any market weakness will be outweighed by the strong fundamentals of Swedish banks and the rarity value of Swedish AT1s,” Tim Skeet, a DCM managing director at Royal Bank of Scotland Plc, in London, said in a phone interview. “Given their high capital levels, the big four won’t need to sell a lot of securities.”

Swedish banks will likely be able to sell AT1s at lower coupons than others, according to Skeet.

“In the current conditions they might expect to issue AT1s with coupons somewhere around the 5 percent mark, depending on market sentiment at the time.”

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