Riskiest Debt Captures Hearts of Denmark’s Smallest Banks

By Frances Schwartzkopff  

Some of Denmark’s smallest banks have developed a taste for the riskiest bonds available to the industry.
As Scandinavia’s biggest lenders, including Nordea Bank AB (NDA) and Danske Bank A/S (DANSKE), turn to additional Tier 1 debt to help build their capital buffers, investors can also opt to buy the notes from community banks at a much higher coupon.
Though costly to issue, because the debt forms part of a bank’s defenses against insolvency, additional Tier 1 debt is “a more efficient way to increase core capital” for small banks than raising equity, said Torben Jensen, director of Nykredit Debt Capital Markets. “Smaller banks in particular have less access to equity markets than larger banks.”
The bonds are becoming more common in a corner of the bank industry that was shut out of funding markets in 2011, when Denmark became the first European nation to
enforce bail-in legislation. Since then, European Union plans to require all unsecured bondholders to share losses have removed Denmark’s pariah status and helped restore access to capital markets for its smallest lenders.
“The credit quality has been improving significantly,” said Jensen. “The defaults removed the weakest.”
Nykredit has arranged AT1 sales as small as $2.5 million, like the one it did earlier this year for Broager Sparekasse. Investors in that issue are getting 10 percentage points more than the five-year swap rate.

The Terms

Contingent capital allows issuers to withhold coupons. The debt can covert to equity or be written down if pre-set capital triggers are breached. In some cases it can be written up again.
Even mid-sized banks pay coupons that are well above rates offered by the biggest issuers. Saxo Bank A/S last month sold 42.5 million euros ($53 million) in additional Tier debt at 9.75 percent, 400 basis points above the rate Danske is paying its investors.
Banks in Denmark have been warned by the regulator not to sell the notes to retail investors. In the U.K., their sale to the retail market is banned altogether.
Danish banks, including mortgage lenders, may sell as much as 35 billion kroner ($5.8 billion) in additional Tier 1 notes and 47 billion kroner in Tier 2 contingent capital, the central bank said in June. The final figure may be higher still, it said.