Reuters: Bankruptcy News: Danske launches bond buyback following S&P U-turn

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Danske launches bond buyback following S&P U-turn Sep 18th 2013, 13:36 Wed Sep 18, 2013 9:36am EDT * S&P's revised methodology prompts cash offer * Issuer could achieve 95% take-up By Aimee Donnellan LONDON, Sept 18 (IFR) - Danske Bank is seeking to retire a Tier 2 issue that has lost almost all of its equity content following an unexpected rating methodology U-turn from S&P in July. Denmark's biggest financial institution is offering investors a purchase price of 101.5 - a one-point premium versus mid-market secondary levels - to buy back the remainder of its USD1bn 25-year non-call five Tier 2 transaction that priced in September last year. Danske issued the notes for the specific purpose of improving its RAC ratio. In July, however, S&P published its revised bank hybrid rating methodology. That has resulted in the notes' equity content being reclassified from intermediate to minimal, implying in turn that the bond would no longer be included in the bank's RAC ratio. Danske in July said that the terms of the notes provided for an amendment to allow the inclusion of a call option at par following a change in S&P's capital recognition. If investors decide to pass on the any-and-all tender, therefore, then bonds will be called at par on or around November 18. "Danske has very few options now that the bonds no longer fit the purpose they were issued for and are now just very expensive capital," said a liability management expert. According to the issuer, certain characteristics of the deal had been specifically designed to address S&P's requirements, and went beyond the relevant regulatory demands. "The inclusion of such features impacted the pricing of the notes, resulting in a higher cost compared with a conventional Tier 2 issue," the bank said in a statement on Wednesday. INVESTOR REACTION Investors are unlikely to be thrilled with the prospect of tendering bonds that are giving them an annual coupon of 7.125%, and would have preferred an exchange offer instead, liability management bankers said. "A few accounts have already said they would like to have had the option to be placed in another bond, but Danske just wanted to go for a straight cash tender," said a banker. Steen Blaafalk, however, treasurer at Danske, explained that the bank did not feel it could design an instrument that would be a good option as a replacement. "Around 50% of the old deal was sold to high-net-worth investors who are looking at high-yielding instruments," he said. "If we did a plain vanilla Tier 2, it would come at half the yield of the old deal and would therefore not be attractive for this investor base. Additional Tier 1 yields higher, but we don't feel there is enough clarity right now to launch this type of instrument." Blaafalk added that there were still questions in Denmark surrounding the tax-deductibility of Additional Tier 1 instruments, while the European Banking Authority has yet to clarify whether AT1 could count as 100% capital upfront. Bondholders are unlikely to refuse the offer, according to Simon Adamson, a credit analyst at CreditSights. "The bank was under no obligation to buy back the bonds above par, so it is clearly trying to play fair with its bondholders," he said. Danske's Blaafalk said the bank wanted to show good faith to investors, which is why it offered a small premium over where the bonds were trading. Bankers say they could see as much as a 95% take-up for the offer, which could be hard work considering 68% of the bonds were sold to private banks. Liability management experts, however, say buying back bonds from private banks instead of institutional investors is not as difficult as it sounds. "In exercises like this you first go to the relationship manager that typically recommends the trade to private banks and you can easily get 20-30% just by announcing it," said a liability management expert. Apart from private banks, fund managers bought 24%, insurance companies and pension funds 5%, and banks 3%. MORE CAPITAL TO COME Bondholders have until 1700 CET on October 1 to tender their bonds via dealer managers Barclays, Credit Suisse, Danske Bank, HSBC, and Societe Generale. After the tender is completed, bankers believe that Danske is likely to emerge with a new capital transaction, particularly given that the bank has come under regulatory pressure for having insufficient capital this year. In June, Danske was ordered by the Danish regulator to change how it calculates its solvency and set aside more risk capital. Blaafalk said the bank had announced its capital plans in the second half, which will see it run with a 17% total capital ratio, made up of 13% Common Equity Tier 1 and 4% of Additional Tier 1 and Tier 2. "We have ample capital right now and redeeming this instrument will only impact capital by 0.7%," he said. (Reporting by Aimee Donnellan, additional reporting by Helene Durand, editing by Julian Baker) Link this Share this Digg this Email Reprints

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