Setting the stage
Nykredit Realkredit stole a march on Europe’s major lenders as it opened the market for so-called Tier 3 debt, setting the stage for a flood of similar issuance from the banking sector.
Like other banks in Europe, the Danish mortgage lender was aware that it had to raise billions in loss-absorbing debt to satisfy regulators that creditors rather than taxpayers will shoulder the costs of future crises.
French banks had been widely expected to pioneer a new type of senior debt to meet those requirements, but Nykredit beat them to it, pricing a ground-breaking €500m three-year senior resolution note issue in June.
“This was the deal of a lifetime for us,” said Nicolaj Legind Jensen, head of funding at the Danish lender.
The rationale was twofold. In addition to its regulatory requirements, Nykredit risked remaining on negative outlook at S&P without raising this debt. But with costs under intense scrutiny ahead of an envisaged IPO, Tier 2 issuance was simply not an option.
Nykredit’s funding team therefore structured a new senior instrument, bringing BNP Paribas, Goldman Sachs and Morgan Stanley on-board along the way.
The name – one of about 20 options devised by the bank – was crucial to the bond’s positioning in order to avoid overpaying, while also keeping the regulator happy.
The strategy paid off. Buoyed by extensive investor work, including 65 meetings for the SRN alone, the book included all the major asset managers, with orders nearing €2.5bn and the issuer saving 125bp compared with a theoretical Tier 2 transaction.
The bonds rallied strongly from their reoffer level of swaps plus 110bp despite pricing at the tighter end of the massive 95bp–200bp range guided by investors, highlighting the challenge of pricing a new asset class.
Though Nykredit is not subject to the minimum requirement for own funds and eligible liabilities standard that applies to other European banks, it has provided a much needed pricing point in the burgeoning Tier 3 market, and the funding team was bombarded with calls from other market participants.
“Where Nykredit Realkredit has gone, we expect many others may follow,” S&P wrote in a note at the time.
The ratings agency revised its outlook on the bank to “stable” from “negative” after the issuer’s second deal in the format only one month later, in what was the first unsecured financial euro transaction after the UK voted to leave the European Union.
“We think this level of leadership is unsurpassed for an issuer of our size,” said Henrik Hjortshoj-Nielsen, Nykredit’s head of group treasury.