Moody’s, S&P attest to Nykredit SRN benefits after second issue

New Nykredit Realkredit “senior resolution notes” (SRNs) are positive for holders of its covered bonds, Moody’s said yesterday (Thursday), after S&P revised its outlook on the issuer from negative to stable and the Danish issuer reopened the euro senior market with its second such deal.

Nykredit Realkredit on 6 June sold its first SRN, a Eu500m three year issue, with the second, a Eu500m five year, following on Thursday of last week (7 July).

The “Tier 3” instrument was established to fulfil a similar purpose to the HoldCo debt of issuers in the UK and Switzerland and other new legislative solutions in the EU for liabilities that contribute to issuers’ MREL/TLAC-type requirements.

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 under Danish regulations. For Nykredit Realkredit, this is equivalent to approximately Eu3bn, according to the issuer. The notes also fund overcollateralisation.

Moody’s – which rates Nykredit on an unsolicited basis – said yesterday that because the SRNs can be written down to absorb losses, ranking junior to unsubordinated debt if the entity were to enter resolution, and increase Nykredit Realkredit’s buffers in resolution, they are a credit positive for the issuer’s covered bond and senior unsecured investors.

Moody’s noted that with its two SRNs Nykredit now has covered about 32% of its debt buffer requirement, which will be phased in toward 2020.

On Friday of last week (8 July), Standard & Poor’s (S&P) revised from negative to stable the outlook on its ratings of Nykredit Realkredit and subsidiary Nykredit Bank, in part to reflect the contribution of the new SRNs to the issuer’s additional loss-absorption capacity (ALAC) buffers.

S&P cut the ratings from A+ to A, on negative outlook, in July 2015 when removing systemic uplift from its Danish bank ratings upon the implementation of BRRD, 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 SRNs, partially through Tier 2 issuance.

Upon raising the outlook last week, S&P said that Nykredit Realkredit has made “significant progress” in issuing capital instruments, also including Eu500m of Additional Tier 1 (AT1) issuance and Eu850m of Tier 2 last year, alongside the first SRN issuance.

“This issuance qualifies for ALAC, and we now expect the ALAC ratio for the bank to surpass our 5% threshold by 2017,” said the rating agency.

S&P said it expects Nykredit Realkredit to issue further Tier 2 or Tier 3 instruments to offset approximately DKK12bn (Eu1.61bn) of junior covered bonds as they mature, and improve ALAC as it prepares for an IPO in the next two years.

The rating agency added that the planned IPO, announced in February, could also support the current ratings.

“We continue to include a one-notch positive adjustment for ALAC support from Nykredit Realkredit’s a- stand-alone credit profile (SACP),” said S&P. “We note, however, that a successful IPO could improve our assessment of the bank’s capital and earnings, which would bolster Nykredit’s SACP.

“However, this would reduce the excess capital in Nykredit Realkredit’s ALAC buffers, likely prompting us to remove the additional notch for ALAC support.”

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

Launched on Thursday of last week, Nykredit’s second SRN issue was the first senior unsecured issue from a financial institution in euros after the UK’s Brexit referendum. A banker at one of the leads said that the senior market had been relatively resilient in the aftermath of the vote, while Nykredit’s first, three year SRN had tightened from 110bp mid-swaps at launch on 6 June to 74bp over.

Leads Danske Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Nykredit went out with initial price thoughts of 115bp over for the new, five year issue and ultimately priced it at 98bp on the back of around Eu2.25bn of demand from some 170 investors.

“Further testament to the success of the trade was the slim high single-digit new issue premium offered and the ensuing early secondary performance of 8bp-9bp,” said the lead banker.