Nykredit sells first Danish T2 CoCo in 5x covered Eu600m

Nykredit Realkredit launched the first Tier 2 CoCo out of Denmark on Friday, a Eu600m (Dkr4.48bn) 22 year non-call seven transaction that was five times oversubscribed.

The deal comes after Danske Bank sold the first CoCo from Denmark, a Eu750m AT1 issue, at the beginning of March.

Nykredit Realkredit’s Tier 2 CoCo is its first CRD IV/CRR-compliant capital instrument.

Nicolaj Legind Jensen, head of funding at Nykredit, said that the group had been planning for new capital issuance ahead of the call dates of outstanding old-style Tier 1 instruments this year and next, with a Eu500m step-up callable in September 2014 and a Eu900m non-step-up in April 2015.

“So we had been looking at this for some time, but had been waiting for regulation to fall into place,” he said. “We have then been effectively working on this transaction for three or four months.”

Danske Bank’s transaction was only launched after certain tax issues related to the new generation of hybrid instruments in Denmark was resolved, and Jensen said that the resolution of these ahead of its peer’s transaction made preparing Nykredit’s Tier 2 CoCo easier.

However, Jensen said that the release of a Standard & Poor’s FAQ relating to Tier 2 hybrids in the midst of Nykredit’s preparations necessitated some extra work.

“We did have some issues trying to adapt to S&P’s revised views, but we managed to find a solution in the end,” he said. “Basically it needs to be refinanced before it can be called.”

An aim of the transaction was to support Nykredit Realkredit’s senior ratings.

The bank set about a four team, three day roadshow in the week before launch, having mandated as leads Barclays, BNP Paribas, JP Morgan, Natixis, Nykredit Markets and UniCredit. According to Jensen, investors’ focus was on the credit rather than the structure of the deal.

“Of course investors needed to get comfortable with the structure, but that was fairly quickly done given that it is a Tier 2 with must-pay coupons and therefore provides a bit more certainty than the Tier 1 varieties out there,” he said. “So it was more the Nykredit story, and the capitalisation and future capitalisation of Nykredit that was uppermost in investors’ minds.”

The 22 year non-call seven instrument has a 7% permanent write-down trigger at solo and group level.

An aspect of the transaction that was adapted in light of investor feedback was a plan to issue two tranches rather than the single, Eu600m tranche that ultimately emerged. That plan would have meant a non-call five issue being sold alongside the non-call seven, affording Nykredit a smoother refinancing profile.

“We were also at some point considering a dual tranche issue, with two sub-benchmark deals, but we got some pushback from investors towards that, and therefore we decided to do one larger benchmark deal,” said Jensen.

He added that the Eu600m size reflected the issuer’s needs.

The leads went out with initial price thoughts of the 300bp over mid-swaps area on Thursday of last week (22 May) and attracted Eu1.5bn of indications of interest. Jensen said that comparables and initial investor feedback were taken into consideration to arrive at the IPTs.

“There are Tier 2 CoCos out there,” he said, “but not really from a similar jurisdiction or a similar bank, so we also looked at what was outstanding from Danske Bank in terms of plain vanilla Tier 2 and their Tier 1, and also a bit to where traditional Tier 2 was trading for the Swedes.”

Books were then opened the following morning and after demand quickly approached Eu3bn guidance was set at the 290bp area, according to one of the leads, with the strong order book, comprising some 200 accounts, ultimately justifying a 285bp re-offer spread.

“It was an excellent outcome given that we are a new issuer and it is the first Tier 2 CoCo out of this jurisdiction,” said Jensen. “We managed to get a lot of new investors on board, which is of course something that we are always quite happy about.”

He noted that the deal tightened on the break to trade at around 270bp-272bp on Wednesday.

Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, said that the 285bp over level was an “outstanding” result for the Tier 2-hosted CoCo with permanent write-down.

“In secondary, Nykredit bonds are already trading very close to UBS with temporary write-down features,” he added. “So this is further evidence of the compression that is going on in the deeply subordinated format, particularly if you look at credit spread differentials in the senior unsecured market.

“And convergence across names and formats is likely to continue in high beta instruments if the ECB proceeds with additional ‘liquidity easing’ next week.”

Asset managers were allocated 47%, pension funds and insurance companies 20%, private banks 11%, hedge funds 10%, banks 7%, and SSAs 2%. Nordic investors took 30%, the UK and Ireland 28%, France 10%, the Benelux 7%, Germany and Austria 8%, Switzerland 7%, Italy 5%, Iberia 3%, Asia 1%, and others 1%.

Nykredit’s Jensen said that an AT1 issue was not in Nykredit’s thinking.

“We had no Tier 2 outstanding at all, so from a cost perspective it would seem odd if we had started filling up our Tier 1 buckets before looking at Tier 2,” he said.

“We haven’t made a decision yet, but we may come to market in the next year or so,” he added. “But in which structure, it’s still not clarified.”