Senior Bondholders Added to Bail-In Buffer in Danish Experiment

  • Nykredit’s senior resolution notes a Nordic first, Fitch says
  • Robeco Nederland is looking into investing in Nykredit note

Denmark’s biggest covered bond issuer plans to sell an entirely new type of senior unsecured debt, paving the way in Scandinavia for an asset class designed to ensure investors bear the cost of the next financial crisis.

Nykredit Realkredit says it will offer around 500 million euros ($557 million) in June in what it’s calling “senior resolution notes,” securities that are intended to function like senior debt while the mortgage lender is in good health, but which can be written down if it goes into resolution.

“They’re pretty early out. I don’t think anyone else in the Nordic region has done it yet,” said Jens Hallen, a banking analyst at Fitch Ratings. He’s assigned the new security a rating of A, on par with Nykredit’s existing senior debt, because “the probability that something will go wrong is the same for this as for the current senior unsecured.”

Crisis Buffers

Denmark is ordering its mortgage banks to hold buffers equal to 2 percent of total assets to guard against taxpayers having to foot the bill in the event of a collapse. The requirement is part of the last wave of regulation in Europe after the financial crisis and aimed at allowing banks to collapse without disrupting the economy. Nykredit, a cooperative, also plans to sell shares to the public for the first time to meet capital requirements.

The new bond is “designed to mirror the terms that you find in the BRRD,” the Bank Recovery and Resolution Directive, said Morten Baekmand Nielsen, Nykredit’s head of investor relations. “We expect there will be a lot of questions: What is this, how does it work?”

Differing Approaches

Investor confusion has in part been stoked by the fact that countries are implementing the European directive differently, specifically a minimum requirement for own funds and eligible liabilities to absorb losses. Just what constitutes eligible is up for debate.

Sweden’s resolution agency warned investors earlier this month against jumping to conclusions as it finalizes the country’s rules. The National Debt Office in Stockholm has set an average level for MREL but has postponed a decision on which instruments can be used pending further analysis.

One thing is certain, Nielsen said: “It is in the instrument family that will have significant volume in Europe in the next few years.” The biggest banks in France and Spain face a 96 billion-euro ($107 billion) shortfall, according to ABN Amro.

Nykredit plans to put the instrument to several uses, including meeting over-collateralization requirements for its covered bonds and improving credit ratings, Nielsen said. Issuing more loss-absorbing instruments should reverse a negative outlook at S&P Global Ratings, he said. S&P said Thursday it rated the notes BBB+.

While the notes would be written down before the bank’s senior unsecured debt, that would occur only after capital and more junior notes, including Tier 2 capital, are used to absorb losses, S&P says. Even a capital injection by the Danish government wouldn’t necessarily trigger their conversion, if the intervention complies with European rules.

Good Liquidity

The timing is relatively good, with central bank stimulus generating liquidity. The market “is decent enough,” Nielsen said. “We wanted to go ahead with that. We don’t want to be in a situation where we have to issue a lot within a very short deadline.”

The largest investor in Nykredit’s most actively traded debt instrument says it will consider buying the new security. Jan Willem de Moor, portfolio manager at Robeco Nederland BV, said it “is something we will take a look at.” Robeco is the second-biggest holder, after Nykredit itself, of the bank’s subordinated bond maturing 2027.

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