Danske Eu750m AT1 opens Nordics with a bang

Mar 6th, 2014

Danske Bank opened the market for contingent capital for Nordic banks with a bang yesterday (Wednesday), drawing some Eu13bn of demand for its much anticipated AT1 transaction and achieving the lowest coupon to date for the new type of hybrid bank capital.

DanskeThe deal was one of three contingent capital (CoCo) transactions launched this week as more European banks move to take advantage of investors’ appetite for yield and the nascent market for loss-absorbing bonds seemingly goes from strength to strength.

Nationwide Building Society on Tuesday opened the sterling AT1 market with a £1bn perpetual non-call 5.25 year deal, with Banco Santander in the market alongside Danske yesterday with a debut CoCo of its own, a Eu1.5bn perpetual NC5 AT1.

An AT1 mandate from Belgium’s KBC Bank has added to a growing euro pipeline, while Lloyds Banking Group is reported to have launched an offer of up to £5bn-equivalent of euro, sterling and US dollar AT1 bonds in exchange for Enhanced Capital Notes.

Danske’s issue is a Eu750m perpetual NC6 that would be temporarily written down if the issuer’s Common Equity Tier 1 (CET1) ratio drops below 7% on a Basel III (transitional) basis. Leads Bank of America Merrill Lynch, BNP Paribas, Danske, Goldman Sachs, HSBC and JP Morgan priced the deal at a coupon of 5.75%, the lowest to date on any AT1 instrument, with orders worth around Eu13bn coming in from nearly 700 investors, according to one of the leads.

Alex Sönnerberg, Nordic FIG DCM origination at Crédit Agricole CIB, said that Danske’s deal highlights the “tremendous” appetite for AT1s at present and that it is encouraging for other Nordic banks looking to participate in the market once there is sufficient regulatory clarity.

“Although demand was primarily driven by UK asset managers, as expected, it was very encouraging to see Nordic investors getting fully engaged in the asset class for the first time, picking up a quarter of the book,” he said. “This bodes well for other Nordic banks looking to issue AT1s later this year, and given the high credit quality of Nordic banks relative to many European peers it will be very interesting to see what levels they can bring new AT1s at.

“Next in line to issue an AT1 in the euro market will be KBC,” added Sönnerberg, “which like many Nordic banks is less focussed on corporate and investment banking, so it should be an interesting deal to watch for the Nordic region.”

Nordic participation, at 24%, was the highest distribution to the region of any AT1, according to one of the leads.

Peter Holm, senior vice president, group treasury, Danske Bank, said that the issuer had anticipated being able to execute a successful transaction given the strength of the market, as demonstrated by recent deals, and the strong buffer to the 7% CET trigger, but that the actual outcome of the deal surpassed expectations.

“The speed with which the order books grew and the magnitude of demand came as a very pleasant surprise,” he told Nordic FIs & Covered. “As a result we were able to price at the tightest level for any AT1 issue despite the high 7% trigger, so we are indeed very pleased with this.”

“We could have sold a larger deal, but Eu750m was our goal and this is what we communicated to investors and we stood by that.”

Investors in Danske’s AT1 are protected from a temporary write-down on their holdings by a CET1 cushion of 690bp, according to Sönnerberg. That compares with a 530bp buffer-to-trigger for Santander’s AT1, which converts to equity if the bank’s CET1 ratio falls below 5.125.

Sönnerberg noted that Danske’s AT1 was trading higher in the secondary market today (Thursday), opening at 102.5/102.625, equivalent to a 5.40% yield-to-call.

Danske announced the mandate for the deal last Wednesday (26 February) and then laid the groundwork for its AT1 transaction with an intense two day roadshow carried out this week by three teams who met nearly 150 accounts.

“I have never participated in a roadshow like this before,” said Holm.

A syndicate banker at one of the leads said that the immediate interest for the transaction was “overwhelmingly high”, with many investors indicating concrete demand volume and desired return both before and during the roadshow and ahead of any transaction details being released.

As a result, the leads were able to do without an initial price thought (IPT) process and open order books directly. Guidance was set at the 6% area, with the leads keeping the order books open only for the minimum one hour.

The AT1 transaction is the latest step in Danske’s capital planning and preparations for prepayment of a Dkr24bn government hybrid in April, after a series of Tier 2 issues in a range of currencies last year and equity issues before that.

Clarification on certain Danish tax issues including treatment of coupons on a new-style hybrid issue had kept Danske from launching an AT1 earlier, but Holm said that the issuer had gained the necessary comfort on these aspects.

“The political parties in Denmark have signed an agreement to continue the tax deduction on coupon payments that has applied for our hybrids since 2004,” he said, “and a few weeks ago this issue together with CRD IV legislation was presented in parliament, with passage expected by the end of March.

“The political agreement behind all this means we had the confidence to proceed with our AT1.”

Asset managers took 63% of Danske’s AT1 securities, followed by hedge funds with 16%, pension funds 7%, private wealth 6%, insurance companies 4%, and banks 4%. UK and Ireland were allocated 40%, the Nordics 24%, France 8%, Germany and Austria 6%, US offshore 6%, Switzerland 5%, 3% each for the Benelux, Asia and Iberia, and others 2%.

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