Danske in T2 buyback as tax uncertainty scuppers exchange idea

Danske Bank has launched a cash tender offer for a $1bn (Eu748m, Dkr5.58bn) Tier 2 instrument it issued a year ago that lost favourable equity treatment by Standard & Poor’s in July, with uncertainty over the tax treatment of new instruments preventing the issuer from offering an exchange.

The Danish bank announced the any-and-all tender yesterday (Wednesday), offering to buy back the 7.125% 25 year non-call five securities at 101.50, with the exercise closing on 1 October.

The possibility of such a move had been flagged in July, when Danske said it was considering its options after the equity treatment of the instrument in S&P’s model was cut from “intermediate” to “minimal”, meaning that it would no longer be included in the bank’s Risk Adjusted Capital ratio by the rating agency.

Steen Blaafalk, Danske Bank

A FIG banker said that the bonds had been trading above the tender offer price, at around 102.50-103.25, with investors having speculated that the issuer would either not call the bonds or offer an exchange. The price dropped back to around the tender offer level of 101.50 once the buyback was announced, he added.

The bank said when announcing its H1 results that it was considering issuing capital instruments through to Spring 2014 when a state hybrid instrument can be called, but Steen Blaafalk, Danske Bank treasurer, told Nordic FIs & Covered that the time was not right to offer a new instrument in exchange for the Tier 2 securities.

“We looked very carefully into whether we should offer an exchange,” he said, “but there are a couple of things that prevent us from doing so.”

Some 60% of the Tier 2 instrument is held by high net worth individuals — the balance being with US dollar institutional investors — and Blaafalk said that were the bank to offer the first group a new instrument a hybrid Tier 1 issue would be the most appropriate in that it would be another high coupon instrument.

“But we are not yet ready to issue Tier 1 now as we need some clarification on a couple of tax issues,” he said.

According to Blaafalk, the European Banking Authority needs to clarify whether Tier 1 instruments can be 100% accounted for upfront or after a tax haircut, while it is not clear whether it would be treated as debt or equity under Danish tax legislation, and hence be tax-deductible or be subject to withholding tax.

“I think the EBA will come with some clarification and that tax legislation in Denmark will be cleared up so that they can incentivise banks to issue without having worries in this area,” he added.

With an exchange into Tier 1 therefore not an option, Danske had to consider what the best alternative would be.

“One option would have been a traditional Tier 2, and it could be a good time to issue a Lower Tier 2, but we haven’t decided on that yet and in terms of an exchange it doesn’t offer anything similar, either coupon-wise or structure-wise,” said Blaafalk. “So we thought the best solution would be to offer a tender for cash, with a slight premium to investors to incentivise them to take the offer now instead of taking the call at par.”

The joint dealer managers are Barclays, Credit Suisse, Danske, HSBC and Société Générale.