Photographer: Casper Hedberg/Bloomberg

Nordea Sets Record on Riskiest Bank Bonds

Updated on
  • Biggest Nordic bank issues additional Tier 1 at lowest coupon
  • Danske Bank also has record-low rate on senior unsecured debt

It may well be the lowest interest rate ever set on the riskiest bank debt, and investors wanted seven times as much as was offered.

Nordea Bank AB’s issuance of so-called additional Tier 1 notes, which act much like equity if a lender gets into trouble, got a good deal of attention this week as it became clear the coupon was set well below anything seen before. Creditors who buy the notes are more at risk of incurring losses than any other group of Nordea debt holders.

“I can’t remember seeing a lower one,” Katrine Jensen, a credit analyst at Danske Bank A/S, said of the coupon. “Investors are looking for yield” and Nordea’s notes “offer a good pickup compared with other investments that are investment grade.”

The biggest Nordic bank, an AA- rated issuer at S&P Global Ratings, was in part able to sell at such low rates because investors have more cash than they know what to do with. That placement need is overshadowing anxiety about what might happen when central banks start removing stimulus.

The Details

  • Nordea sold 750 million euros ($880 million) of AT1 contingent convertible bonds
  • Rating is expected to be BBB at S&P and Fitch
  • Coupon was set at 3.5 percent and bid-to-cover ratio was 7

The terms “show investors’ confidence in Nordea’s financial strength and low-risk profile,” Ola Littorin, head of long-term funding, said in a statement. The bank also said the decision to move its headquarters to Helsinki from Stockholm, though controversial among Swedish customers, seemed to have no effect on creditors.

Read more: Angry Nordea Clients Force Bank Downgrades Ahead of Earnings

Long-term funding costs have been declining since 2013, according to Nordea. Subordinated debt made up 4 percent of the bank’s long- and short-term funding of 204 billion euros (gross, in the third quarter.)

Nordea isn’t the only Nordic bank achieving such low borrowing costs on unsecured debt. Danske, the region’s second-largest bank, sold senior unsecured notes on Tuesday at what the head of group funding in the bank’s treasury department, Bent Callisen, said was “by far the tightest spread, post crisis. And it compares well to the similar issues in Europe and the Nordics.”

According to Callisen, the bank was helped by the shrinking supply of senior debt as it gets replaced in Europe with bail-in-able senior non-preferred notes being issued to comply with resolution requirements. He also says continued central bank bond purchases are key.

Read more: ECB Is Said to Review Corporate-Bond Plan as Next QE Step Nears

Investor demand is also generating record-low rates in Denmark’s $480 billion covered bond market, the world’s largest.

Nordea’s Danish mortgage subsidiary held refinancing auctions this week, and the interest rate on one-year bonds fell to minus 0.24 percent, the bank said on Thursday. Good for borrowers, but not so good for investors, said Lise Bergmann, a housing analyst at the bank.

“That is great, but it’s also a little wild that rates can continue to fall,” Bergmann said in a note. “At the moment, it’s more fun to be among those who have to borrow money than among those who have to find a place to put it.”

How and when central banks unwind their extraordinary support measures is the elephant in the room. But for the time being, there’s more cash than fear.

“Investors need a place to put their money,” Jensen said.

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