Danske Tier 2 rethink after S&P change

Danske Bank is considering its options for dealing with a change in methodology by Standard & Poor’s that means certain features of Tier 2 subordinated debt issued in September no longer count toward the bank’s RAC ratio, it said on 17 July.

Danske issued $1bn of Tier 2 subordinated debt in September for the specific purpose of improving its Risk Adjusted Capital (RAC) ratio in accordance with S&P rating methodology, said the bank.

S&P deemed the debt to represent “intermediate” equity content, which meant it was eligible for inclusion in the RAC, but following a revision of its methodology – flagged in March and finalised in July – the securities are only considered to have “minimal” equity content. This, said Danske, implies that the Tier 2 issue will no longer be included in the RAC ratio.

“At the time of issuance, the securities had been designed according to S&P’s methodology, and certain features were incorporated beyond regulatory requirements specifically to address S&P’s requirements,” said the bank. “The inclusion of such features impacted the pricing of the Securities, resulting in a higher cost compared with a conventional Tier 2 issue.”

Speaking to Nordic FIs & Covered in September, Peter Holm, head of group funding, treasury at Danske Bank, said that the bank “tried to tick all the boxes” required by S&P for the Tier 2 issue to count towards the RAC.

In its July statement Danske said that the terms of the debt provide for a possibility of an amendment, following consultation with the Danish regulator, to allow for the inclusion of a call option at par after a change in S&P’s capital recognition.

Following consultation with legal advisors and the Danish Financial Supervisory Authority Danske has concluded that such options are available, and is considering these, it said in a statement on 17 July.

A spokesperson on Tuesday told Nordic FIs & Covered that the bank has not yet made a decision about the next steps.