Riskiest Bank Debt Issuance Wins Moody’s Favor in Sweden

By Frances Schwartzkopff

Sweden’s decision to impose tougher bank capital rules earlier than most other countries is proving to be a gift to the industry that keeps on giving.
The country’s biggest banks are set to win investor approval when they step up issuance of the riskiest bank bonds, additional Tier 1 capital, according to Moody’s Investors Service. The rating company predicts Swedish banks will sell as much as $2.9 billion of the securities by 2016.
“We do think there will be investor interest in these,” Oscar Heemskerk, associate managing director in Moody’s EMEA Financial Institutions Group, said by phone on Friday. “That comes partly because the Swedish banks, if you look at their finances, have performed strongly compared with their European peers.”
The country’s biggest banks have already started
issuing additional Tier 1 debt, which is written down if pre-set capital levels are breached, at record-low coupons. Nordea Bank AB (NDA), Scandinavia’s biggest lender, sold $1.5 billion in the securities in September at the lowest dollar yields recorded. One month later, Swedish banks topped the European Banking Authority’s stress tests by achieving the highest scores in an adverse scenario.

Crisis Lessons

Five-year credit-default swaps on Nordea trade at about 62 basis points, or some 10 basis points less than it costs to insure against a default on bonds sold by the government of Japan, according to data compiled by Bloomberg. Swaps on Svenska Handelsbanken AB trade even lower, at 44 basis points at the end of last week, below those of the government of France.
Sweden, drawing on lessons from its banking crisis in the early 1990s when it was forced to nationalize two lenders, requires its banks to hold common equity Tier 1 capital ranging from 14.7 percent for Nordea to 19 percent for Swedbank AB. Basel III sets a 7 percent minimum. Sweden’s lenders, whose assets are equivalent to four times the nation’s $550 billion economy, have met the stricter rules by retaining earnings, reducing balance-sheet risks and cutting costs.
Moody’s said additional Tier 1 capital “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,” in a Dec. 12 note.

Capital Costs

SEB AB followed Nordea last month, selling $1.1 billion in additional Tier 1 notes with a coupon of 5.75 percent.
Swedish banks may issue as much as $4.9 billion of the securities by 2019, as they’re forced to replace debt that no longer meets regulatory requirements faster than the rest of Europe, Moody’s said. Banks also may be able to cut their weighted cost of capital by shifting to the instruments from equity, the ratings company said.
Yet some regulators have started warning banks against selling contingent capital to retail investors.
In Denmark, the Financial Supervisory Authority requires bankers to have specific qualifications before they’re allowed to sell the securities. In the U.K., the Financial Conduct Authority has issued an outright ban on their sale to individuals amid concern their loss-absorbing characteristics are too complex for some investors to grasp.
“There are additional risks in the securities, but we have the methodology in place to think we can assess them,” Heemskerk said. “These AT1 Cocos are positive for banks and bank creditors because their loss absorbency is stronger than the ineligible instruments they will replace.”