Innovative Nykredit SRN augurs well for Tier 3

Jul 1st, 2016

Nykredit launched what has been touted as the first Tier 3 instrument in the new bail-in era on 6 June, a Eu500m three year “senior resolution note” that sits between its senior unsecured debt and junior loss-absorbing debt and whose reception was said to augur well for similar forthcoming issuance.

Nykredit imageWhile issuers in the UK and Switzerland, for example, have been issuing HoldCo debt to meet MREL/TLAC-type requirements, other European countries – such as France and Spain – have been working on creating new classes of instruments specifically tailored to these. However, Nykredit Realkredit’s new issue differed from either of these routes by being both issued by the operating company of the group and based on not a legislative but a contractual structure.

“The senior resolution note (SRN) is designed to do the same trick as the instruments you have in other countries,” said Morten Bækmand Nielsen, head of investor relations at Nykredit.

Danish mortgage credit institutions – not being deposit-taking – are exempt from MREL, but have to hold a bail-in buffer of 2% of their mortgage assets. For Nykredit Realkredit, this is equivalent to approximately Eu3bn and the SRN contributes towards funding that, according to Nielsen.

The SRNs are also expected to support Nykredit Realkredit’s Standard & Poor’s rating by contributing to its ALAC buffer and helping maintain one notch of ALAC support for its senior credit rating. S&P cut the issuer’s rating from A+ to A, on negative outlook, in July 2015 when removing systemic uplift from its Danish bank ratings upon BRRD implementation, but a further notch of downgrade was avoided by measures including a commitment by Nykredit to build up an ALAC buffer of 5% of risk-weighted assets by mid-2017 – which it had already started doing before the SRN through, for example, Tier 2 issuance.

The instrument is rated BBB+ by S&P, two notches below Nykredit Realkredit’s senior unsecured rating, but Fitch rated it at the same level as senior unsecured debt, A.

Nykredit embarked on a two-team roadshow on 30 May to explain the new structure.

“It was basically the first time anyone had tried to issue a similar instrument,” said Nielsen. “Given that in our specific case it was not based on legislation but rather on a contractual set-up, we thought we would have to explain this very thoroughly so we could be absolutely sure that people are on board.

“And the feedback we got from investors that this was a nice, clean story. Nykredit is relatively easy to understand, and they could also see the legal structure and where this instrument would sit.”

Discussion then turned to where the new instrument should be priced in the wide range between senior unsecured and Tier 2.

“There were two schools of thought,” said Nielsen. “The majority of investors came back and said they were around the area we eventually opened the book – at 125bp. And then there were some investors, but not a lot, who saw it around 30bp wider – they were more in the Tier 2 camp, so to speak.

“But there was so many in the lower spread camp that it didn’t really matter.”

After leads BNP Paribas, Goldman Sachs, Morgan Stanley and Nykredit Markets went out with the initial price thoughts of the 125bp over mid-swaps area for the Eu500m no-grow transaction, they were able to re-offer the paper at 110bp over on the back of more than Eu2bn of orders from some 165 accounts, and the paper tightened in the aftermarket.

“It went well above expectations,” said Nielsen. “No-one had done this before, so we didn’t really know what to expect.

“But we were happy when we printed it and investors were happy with the performance. It can’t get much better than that.”

A banker at one of the leads said that the pricing compared with fair value of 95bp-105bp over based on HoldCo-OpCo and HoldCo-Tier 2 differentials.

“It was positioned in line with HoldCo senior from the Brits and the Swiss,” said Nielsen. “And then we probably also benefitted from the fact it was our first transaction of this kind, and that our funding need in this instrument is relatively limited, compared to the likes of HSBC and the other big guys.

“We said quite clearly that we could have an issuance need of up to Eu2bn. So you can see that we wouldn’t flood the market with this type of this instrument, but there could be other issues.”

A syndicate official away from the leads said that, with MREL and the right tools to address it being the hot topic, the outcome was “good news”.

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