Bail-In Bond Clarity Leaves Swedish Banks Better Off Than Feared

  • Swedish banks will need to issue $56 billion to meet MREL
  • Analysts say guidelines are ‘softer’ than first indicated

Scandinavia’s biggest economy won’t be quite as tough on bank bondholders as first feared.

Sweden last week unveiled a framework designed to ensure taxpayers never pay for finance industry failures. The main takeaway is that so-called minimum requirements for own funds and eligible liabilities (MREL) won’t be as draconian as initially signaled.

Sweden’s debt office, which decides how Europe’s bank recovery and resolution directive is to be enforced locally, backed away from the rules it had previously indicated might be needed and that would have left more creditors on the hook in the event of an issuer failing.

The Swedish National Debt Office estimates that the country’s four biggest banks will have to swap about $56 billion, or one-fifth of their non-subordinated debt, for subordinated instruments by 2022 to absorb losses and enable recapitalization. That’s about 25 percent less than some analysts expected. Individual MREL levels for each bank will be set before the end of this year.

“It’s a bit softer than feared after the proposal last year,” Rolv Kristian Heitmann, a credit analyst at DNB ASA, said by phone. “Still, it’s a decent amount that needs to be recapitalized if it stands like this and it probably will.”

Read more: Sweden to raise banks’ contribution to crisis fund

The debt office’s first proposal in April triggered criticism from the Financial Supervisory Authority, which called it counterproductive. The guidelines that were published on Thursday’s follow “a good dialogue with the Swedish National Debt Office prior to the final rule making,” Peter Svensson, FSA spokesman, told Bloomberg. The office’s “finalized method for setting MREL is properly considering the role that is played by macro-prudential buffers in a going-concern situation.”

The issuance level estimated by the debt office is just three-quarters the amount Danske Bank’s credit analysts had expected Swedish lenders would have to sell. And while the measure goes into force in 2018, banks will have five years to meet the subordination requirement.

“For us, the news was that MREL issuance in relation to total funding will actually be a bit lower than our expectations,” said Gabriel Bergin, credit analyst at Danske.

The agency didn’t restrict banks’ options on how to subordinate the new debt, but said it preferred structural and legal subordination to contractual subordination. It also suggested a new debt category once regulations are in place to allow it. That’s in keeping with European Commission plans for a new senior debt class that can be converted to equity or written down in a resolution.

The plan will drive up banks’ costs since all the debt must be subordinated and the Swedish government recently eliminated tax deductions for subordinated instruments, CreditSights analysts Puja Karia and Simon Adamson said in a note. They also cited an option for the resolution authority to require banks to hold a buffer to the MREL requirement.

“MREL guidance is a new term,” they said.

Nordea Bank AB, Scandinavia’s largest lender, said the time line should enable lenders to swap out the debt. Swedbank AB, Sweden’s largest mortgage bank, said a number of factors will determine exactly how much debt it’s likely to issue and when.

That includes when the legislation allowing for statutory subordination is in place, Gabriel Francke Rodau, head of group communications, told Bloomberg. The bank has no preference for either statutory or contractual subordination, as “we can handle both,” Rodau said.

The Swedish plan may offer some insight into what Norway will do, Heitmann said. The government there is expected to unveil MREL requirements soon, and if it follows Sweden’s risk-weighted approach, “it can be very strict for Norwegian banks,” he said.

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