Raters expect AT1 supply from strong Nordics

Dec 19th, 2014

Moody’s expects Swedish banks to make early, sizeable issuances of Additional Tier 1 (AT1) instruments, while Standard & Poor’s expects a similar trend across Nordic banks, which it said are pulling away from their European peers in terms of capital strength.


Moody’s said in a report on Friday (12 December) that the Swedish issuance of contingent capital securities (CoCos) is credit positive for banks and their creditors, due to an early phasing-in of increased capital requirements in the country. The rating agency forecast $2bn-$2.9bn (Skr15bn-Skr22bn, Eu1.6bn-Eu2.3bn) of Swedish AT1 issuance by 2016 (excluding issuance to date), rising to $4.9bn by 2019.

“We believe AT1 securities will be attractive for Swedish banks because Sweden adopted close to fully-loaded Basel III rules from 2014, ahead of most other European nations and well ahead of the mandated introduction schedule that allows a gradual move to Basel III by 2019,” said Daniel Forssen, associate analyst at Moody’s.

Meanwhile the rating agency said that there is likely to be market appetite for such a volume of issuance because Swedish banks have stronger performance metrics than their European peers and AT1 CoCos provide a higher yield than Tier 2 debt and senior unsecured debt. In addition, as legacy Tier 1 instruments come up for call, Moody’s expects banks to redeem such securities and replace them with AT1 CoCos.

Nordea kicked off Swedish AT1 in September with Skandinaviska Enskilda Banken (SEB) following in November, and Moody’s said Svenska Handelsbanken and Swedbank are likely to issue AT1 securities over the next few years.

“The issuance of AT1 securities is credit positive for Swedish banks and their creditors, because they will boost the banks’ loss-absorbing capital, replace legacy instruments that have less clearly defined loss-absorption features, and increase the possibility that banks can continue to operate as a going concern,” said Oscar Heemskerk, associate managing director at Moody’s.

S&P said in a biannual report on the risk-adjusted capital (RAC) ratios of Nordic banks published today (Thursday) that as at mid-year 2014 the financial institutions have strengthened an already strong position relative to their European peers. It said that this has happened on the back of a more stable operating environment and in the context of more stringent capital requirements that have been imposed by Nordic regulators.

Of 25 Nordic banks S&P rates, five have this year enjoyed positive rating actions — ranging from improvements to elements of their standalone credit profiles (SACPs) to upgrades — associated with improvements in capital levels

“After seeing the market demand for TAC-eligible hybrid issues by Danske Bank, Nykredit Realkredit, Nordea Bank, and SEB in 2014, we expect a number of new and potentially repeat issuers in 2015,” said the rating agency. “These instruments could account for a large share of the capital build over the next two years.

“While increased issuance of loss-absorbing Basel III-compliant hybrid instruments would reduce the proportion of core equity, we note that Nordic banks have a strong quality of capital, represented by common equity to TAC exceeding 90%,” it added. “Consequently, we believe that hybrid issuance could bring improvements in the banks’ RAC ratios and, in some instances, could support SACP improvements.”

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