S&P relents after hearing Handelsbanken, SBAB cases

Sep 26th, 2013

SBAB and Svenska Handelsbanken had their ratings affirmed by S&P yesterday (Wednesday), two months after the rating agency placed them on CreditWatch negative.

Standard & Poor’s rates SBAB A and Svenska Handelsbanken AA-. In the middle of July it placed these ratings on CreditWatch negative due to concerns centred on what it said was a high share of short term funding.

Per Tunestam, treasurer, SBAB, told Nordic FIs & Covered that the CreditWatch negative placement in July had come as a surprise because when S&P had met with SBAB in the context of an annual review only a month earlier it had not highlighted any of the concerns it then cited in its CreditWatch rating action.

“Their reasoning came from a new global bank study that focussed on the two key liquidity ratios that they had been using for some time, and the Scandinavian banking sector stood out as having a low loan to deposit ratio, which was not a new finding,” he said. “In their view SBAB stood out negatively versus our Nordic peers.”

HandelsbankenFlickr_croppedHe noted that the issuer has been compliant with the liquidity coverage ratio (LCR) under Swedish rules since the beginning of January 2013, and that it has for several years been working on extending the duration of its funding.

However, in response to S&P’s rating action the issuer developed and presented an action plan that involves accelerating the extension of its long term funding, according to Tunestam. As another pillar of the action plan the issuer will work to increase the size of its liquidity portfolio.

S&P said that its affirmation of SBAB’s rating “reflects our view that SBAB Bank has a credible and more conservative strategy for its future funding and liquidity than we initially observed”.

It said that it understands the bank to have plans to over the next 18 months reduce its issuance of short term debt and offset this with a higher proportion of long term debt and deposit funding.

“This implies that the bank’s short term funding profile will strengthen, resulting in liquid assets that fully cover maturing short term wholesale funding over a 12 month period,” said S&P. “This also leads us to think that the bank will have broadly achieved a balance between its stable funding needs and its available stable funding sources.”

However, it noted that this will be a challenging adjustment process.

In its affirmation of SBAB’s rating S&P also said it reclassified a Skr2bn (Eu231m) Tier 1 hybrid capital instrument to include it in its total adjusted capital ratio, a measure of core capital.

“This reflects our opinion that the instrument’s terms and conditions do not constitute an implicit step-up as defined by our criteria,” said the rating agency.

The bank’s more risk-averse funding profile also contributed to S&P changing its view of SBAB’s capital and earnings from “adequate” to “strong”.

Tunestam said that the hybrid capital issue, which was launched in 2010, was one of the topics that the bank discussed with S&P in its meetings, with SBAB having drawn on other similar hybrid instruments to argue for its deal to be included in S&P’s ratio. “I don’t know why it was not included before,” he said.

Handelsbanken’s AA- rating was affirmed after S&P reviewed the bank’s strategy for complying with the regulatory net stable funding ratio (NSFR).

“We feel this strategy will resolve some of the mismatches in the bank’s funding profile,” said the rating agency. “In particular, the bank has presented credible plans to reduce its share of short term wholesale funding over the next two years.

“Further, we have seen a measurable confirmation of the bank’s intentions to reduce its share of short term wholesale funding and to improve its liquidity to allow it to be better prepared for any reduction in investor confidence that could reduce its access to wholesale funding.”

Bengt Edholm, head of treasury at Svenska Handelsbanken, said that there are a number of ways in which the issuer can address the concerns that S&P raised, which he described as having much to do with the short dated nature of the Swedish covered bond market.

“It could be to buy back bonds before the maturity is less than one year,” he said, “or it could be to look at the deposit landscape in the bank, or to do with long term funding.”

He attributed S&P’s decision to remove the bank’s rating from negative review to greater transparency of the issuer’s long term funding plan, which it presented to the rating agency following its July rating action.

“We had some very good discussions, and showed them our long term funding plan,” he said. “There was no dramatic change – we didn’t change the funding profile to please S&P – but we were more transparent and explained in detail how the Swedish system works.

“We are very pleased as we want the highest possible rating and think we deserve that.”

S&P said that Handelsbanken recently accelerated its strategy to improve its NSFR and that this will significantly improve the rating agency’s metrics for the bank by the end of 2013.

“Beyond that date, we expect steady improvement in these metrics over the next 18-24 months,” it said.


SHB feeds US appetite

Handelsbanken has been very active in the wholesale funding markets in recent weeks, having tapped the euro, sterling and then Swiss franc markets in a two week period in August before last week selling a $2.5bn (Eu1.85bn/Skr16.04bn) dual tranche senior unsecured bond.

Edholm said that the issuer was mindful of, and wanted to avoid, myriad potential disruptions such as German parliamentary elections, US budget discussions and tapering decisions by the Federal Reserve.

“We wanted to do some funding quickly and now we have the cash on board,” he said. “There is a lot of cash in the market, but that can change quickly in response to headlines.”

The $2.5bn Yankee bond was split between a $1bn three year FRN and a $1.5bn five year fixed rate tranche, and Edholm said the result was very pleasing.

“We see a lot of appetite for our name in the US,” he said. “A couple of weeks ago we saw that all-in levels were on a par with euros, so we did not have to pay up.”

Leads Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and Morgan Stanley priced the FRN at 47bp over dollar Libor, after guidance of 50bp over plus/minus 3bp. Orders totalled $1.8bn.

The fixed rate tranche was priced at 105bp over US Treasuries, in line with guidance of 105bp over and after initial price thoughts of the 112.5bp over area. Orders reached $2.7bn.

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