Danske bypasses money laundering legacy in AT1 return

IFR 2383 - 15 May 2021 - 21 May 2021
5 min read
Tom Revell

Danske Bank returned to the Additional Tier 1 market on Wednesday for the first time since the revelation of the extent of its money laundering failings in 2018.

The lender also took on a challenging market backdrop as it offered investors a US$750m perpetual non-call November 2026 Reg S transaction.

The deal came after a volatile session for global stocks on Tuesday, which nudged bank subordinated debt wider in the secondary market and, in the US onshore market, saw insurer Liberty Mutual postpone a junior subordinated note issue.

Some observers were surprised by Danske's decision to come hot on the heels of Liberty's postponement. A 4.75% US$1bn Banco Santander AT1 offering sold on May 6 also contributed to a tricky backdrop after it struggled to perform and was bid at a cash price of 99.50 on Wednesday.

Kimberly Bauner, head of treasury at Danske, told IFR the bank expected this year to be more volatile than normal and believes execution windows may be more limited.

"Today was likely not an obvious day for execution, given the weaker equity market and some rates volatility," she said on the day of the deal. "But there has been stability in the credit markets, and – importantly – the volatility has been orderly, we have not seen panic-buying or selling."

Leads Bank of America, Citigroup, Danske Bank, HSBC, Societe Generale and UBS marketed the deal with initial price thoughts of 4.625%–4.75%.

With books surpassing US$1.8bn, the deal was ultimately launched at 4.375%.

Getting on with business

The trade represents a significant step for Danske, which remains under investigation in Denmark and other countries over some €200bn of suspicious transactions that passed through its former Estonian branch between 2007 and 2015.

It last tapped the AT1 market in June 2018, selling a 7% US$750m perpetual non-call June 2025 transaction.

At that time, the bank had acknowledged failings in its controls and governance and launched its own investigation into the issue. But it was not until the publication of its findings in September 2018 that the scale of the problem became clear. The scandal prompted then-chief executive Thomas Borgen to step down and hammered Danske's shares and spreads.

"I think we would all like to close that chapter, but we do not have control over the timing or the outcome of the investigations," said Bauner. "As such, we have to get on with our business and our funding despite the pricing discount we see to our Nordic peers."

Bankers estimated that Danske paid a 12.5bp–25bp concession.

The bank's 6.125% US$750m perpetual non-call 2024 AT1 notes were trading at 3.30% on Wednesday morning, while its US$750m of 7% PNC2025s were bid at 3.59%, according to Tradeweb.

Bankers estimated that Nordic peers such as Nordea or Svenska Handelsbanken would have been able to price an equivalent deal at closer to 4%.

The new issue nevertheless boasts the joint-lowest coupon of any US dollar AT1 from a Nordic bank, matching a 4.375% US$500m issue from Handelsbanken in September 2020.

Some bankers said the concession was fair and deemed the demand a good result given the difficult backdrop.

"In periods like this, trades tend to offer some new issue concession . . . it's fair to say it's not zero, but I don't think they paid masses," said a banker at one of the leads.

Others said it reflected a disappointing outcome.

"For a Scandi bank with pretty high capital levels and a nice mid-4% coupon, you would have thought it would have gone much better," said a syndicate banker away from the deal, suggesting either the money laundering issues or Santander's underperformance could be to blame.

"Books under US$2bn didn’t really feel that exciting for an AT1 deal from them and 4.375% probably felt like a 25bp concession."

Bauner said the bank was happy with the outcome, in particular the size and quality of the order book.

"We see the levels achieved today in the AT1 market as attractive from an issuer perspective when looking at historical Nordic bank coupons, and I believe that some investors appreciate the premium in our name for a Nordic national champion."

Risk worth taking

When reporting its first-quarter results last month, Danske said it may be required by authorities to conduct a further investigation, without giving further details.

"The potential penalties arising from the various regulatory investigations into money laundering in its now-closed Estonian branch, particularly from US authorities, remain a source of ongoing uncertainty for Danske Bank, and judging by recent comments at its 1Q21 results, it is likely to drag on for some time," wrote Larissa Knepper, senior analyst for European banks at CreditSights.

But bankers said investors have shown over recent years that they are comfortable with adding exposure to Danske and see sufficient compensation in its spreads.

They added that while governance concerns are important to investors, given the increasing attention to ESG issues, such a historical case was of relatively little importance to AT1 buyers.