Reuters: Bankruptcy News: Danske cements Asia's position as Tier 2 hunting ground

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Danske cements Asia's position as Tier 2 hunting ground Sep 14th 2012, 12:22 By Helene Durand Fri Sep 14, 2012 8:22am EDT LONDON, Sept 14 (IFR) - The Asian dollar Reg S market further cemented its place as a valuable source of capital for European banks this week, after Danske Bank priced a heavily oversubscribed USD1bn 25yr non-call five-year Tier 2 transaction. The deal for Denmark's largest bank priced much tighter than initial price thoughts, after investors piled into the book despite the fact that structural tweaks to accommodate S&P and Danish requirements made it slightly more complicated than ABN Amro's USD1.25bn 10NC5 priced last week. "This was tremendously well received and the USD8bn order book tells you how much money there currently is out there for these trades," said a banker on the deal that was led managed by Danske, BNP Paribas, HSBC, Morgan Stanley and UBS. The demand exceeded the book for ABN's trade last week that saw orders of over USD6bn. There were 252 investors in the trade. "They've got a good size and good pricing and this deal further highlights the strength of that market for European banks," said a banker away from the deal. "This was in the right zip code yield wise as high-grade stuff is so tight that it's getting a bit lost in that market right now. Danske is definitely in the sweet spot." Bankers on the deal agreed that while Danske could have attempted a trade in euros, EUR750m would have been the maximum achievable and pricing would likely have been wider too. The issue priced with a 7.125% coupon, well inside initial price thoughts of mid to high 7s, and not that far from the 6.25% achieved by ABN last week, although that deal has since tightened to below 6%. "We chose the dollar market because we felt that we would be able to capture a broader investor base for our deal," said Peter Holm, senior vice president, group treasury at Danske Bank. "By doing dollars, we could attract not just Asian but also European accounts." The investor reception for the Danske trade is good news for Raiffeisen Bank International and Erste Bank that have both mandated banks for potential trades. Erste is considering either euros or dollars while RBI is looking at dollars. Bankers believe that as long as new trades keep performing - Danske traded up by over a point after pricing - execution should remain strong. STRUCTURE TWIST The RBI and Erste trades are expected to be straightforward Tier 2 issues in a similar vein to recent European bank capital trades. The Danske deal by contrast was structured to be eligible for S&P's Risk Adjusted Capital ratio and had to have a longer maturity, therefore potentially increasing extension risk for investors, as well as have cumulative coupon deferral features, which European Tier 2 does not have to include. The deal would lose its equity credit with S&P after the first call date, although it would retain regulatory capital treatment up until 20 year. A banker on the trade estimated the premium to pay for an RAC-eligible trade to be around 50bp-75bp at worst, but momentum on the deal meant that Danske only paid an extra 25bp-30bp over a more standard Tier 2. "We want to improve our RAC ratio with S&P which is something we had in mind when we structured the deal and which is why it has a longer maturity than traditional Tier 2 and also coupon deferral features," said Holm. "Despite our strong level of capitalisation, S&P does not give us any credit for either our outstanding hybrids and Tier 2 instruments, so we wanted to remedy this with the new instrument." Danske has just over DKK15bn of Tier 2 debt outstanding and a further DKK24bn of hybrid Tier 1 with the Danish government. Its last visit to the Tier 2 market was in 2008, although those deals had short calls and have since been repaid. While the deal will improve the bank's RAC ratio, bankers said that it would not necessarily have a direct positive impact on the bank's Baa1/A-/A senior rating. "The deal could be a template for other banks who want to focus on improving their equity credit with S&P," said a banker on the deal. "In a world where ratings are on a downward trajectory, it makes sense to think about these trades even if it just helps maintain your senior rating rather than get an upgrade." He added that other issuers were potentially interested by similar trades. DANISH EXCEPTION The other feature not present in other Tier 2s is the Danish loss-absorption requirement. There is a potential reduction event if Tier 1 and hybrids have been written down to zero, which bankers on the deal said would be a very remote possibility given that Danske is a national champion where the government still has a stake. On the positive side, investors were able to take comfort from the fact that the Danish authorities have backtracked on the previously harsh resolution regime that saw senior bondholders take losses on their holdings, as with Amargebanken. "The regulator today versus a year ago does not have the power to write down subordinated or senior debt," said a banker on the deal. "They changed the framework in response to the spread-widening that we saw. Under the current package, a bank can be split into a good bank/bad bank with equity and subs staying in the bad bank. Meanwhile, Danske's Holm said that while investors were familiar with what had happened to Amargebanken, they were comfortable that it would not be applied to a large institution. (Reporting by Helene Durand, Editing by Julian Baker) Link this Share this Digg this Email Reprints

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