Nykredit eyes bail-in-able Eu3bn as S&P cuts, other Danes okayed

Nykredit Realkredit has confirmed it is targeting some Eu3bn (Dkr22bn) of bond issuance eligible for bail-in buffers over the next two years to bolster its capital after Standard & Poor’s downgraded it from A+ to A on Monday and left the rating on negative outlook.

S&P cut Nykredit Realkredit amid various rating actions on Danish banks after the country’s implementation of the EU Bank Recovery & Resolution Directive (BRRD) came into effect at the beginning of this month. This resulted in the rating agency no longer factoring in government support in the banks’ ratings, although it now factors in levels of bail-in-able debt to ratings via additional loss-absorbing capacity (ALAC) criteria introduced in April.

S&P said that the one notch downgrade of Nykredit Realkredit and core subsidiary Nykredit Bank reflects that the removal of a previous two notches of uplift for extraordinary government support is only partly offset by a one notch uplift for ALAC.

“In our base case, we expect Nykredit’s ALAC to exceed our threshold of 5% of S&P risk-weighted assets (RWAs), driven in part by its requirement to create a 2% buffer for mortgage banks and supported by ongoing capital generation,” the rating agency said, adding that it expects Nykredit to issue non-deferrable subordinated debt or senior unsecured instruments with contractual write-down features.

The group has said previously that it is intending to issue such debt and yesterday (Thursday) Jesper Berg, head of regulatory affairs and ratings at Nykredit, said that it is planning to raise around Eu3bn over the next two years, some Eu1bn in Tier 2 and then some Eu2bn in similar instruments – the exact nature of the latter being decided upon as instruments eligible for MREL/TLAC evolve.

“So that’s basically the gameplan,” he said.

S&P assigned a negative outlook to the rating, saying that it considers that there is uncertainty on the bank’s projected ALAC “given what we view as a stretch target on earnings and debt issuance”.

“We note Nykredit’s low initial ALAC, the uncertainty of our capital generation forecast, and the potential challenge Nykredit may face in achieving sufficient issuance to surpass our ALAC threshold of 5% of RWAs for a one notch uplift,” the rating agency said.

It also cited as factors in its negative outlook comparably weaker funding and liquidity metrics than those of Nykredit’s peers and its view that, despite a strengthening of Nykredit’s funding profile, further improvements are necessary to reduce the use of short term wholesale funding.

S&P meanwhile improved the outlook on Danske Bank’s A rating from negative to stable.

“The affirmation on Danske Bank and its core subsidiaries reflects that, although we removed the two notches of uplift for government support from the ratings, the group’s earnings have strengthened to those of similarly rated peers, allowing us to remove the negative adjustment,” the rating agency said.

It noted that it has also added one notch of uplift to reflect Danske being likely to exceed an adjusted ALAC threshold of 4.5% in 2016 – adjusted from 5% because Danske has material insurance operations, representing around 15% of risk-weighted assets, that would not be subject to resolution.

The BBB+ rating of DLR Kredit was removed from CreditWatch negative as the rating was affirmed. S&P said that the removal of government support is mitigated by its combined view of DLR’s capital and risk position – with the risk position having improved from “adequate” to “moderate”. It said the stable outlook reflects the balance between its expectations of future ALAC issuance and the need for further strengthening of the bank’s funding maturity profile.

The A- rating of Jyske Bank and core subsidiary BRFkredit was affirmed, on stable outlook, on S&P’s expectation of future capital, efficiency and asset-quality gains as the Danish economy continues to strengthen.

“In our view, the improvement of Jyske’s standalone credit profile (SACP) due to more robust capital and risk positions has offset the removal of uplift for government support from the long term rating,” it said.