Bankers engineer Danish bond to address regulatory uncertainty

Investment bankers have engineered special clauses in a new Danish bank bond that anticipate a change in the law, in the latest sign of uncertainty over European rules to prevent financial failure.

Nykredit’s €500m bond, which priced this afternoon at a coupon of 0.375 per cent, is exposed to losses compared to other senior creditors of the company.

The debt is part of a post-crisis regulatory drive forcing banks to issue special bonds, which in principle reduce the likelihood of taxpayer bailouts by absorbing losses at times of distress.

Different European countries have taken different approaches to meeting the requirements. In Germany, the law has been changed to weaken the position of outstanding bondholders, while France has legislated to create a loss-absorbing class of debt known as “senior non-preferred”.

A number of countries, including Denmark and the Netherlands, have yet to take a definitive approach on the kinds of issuance that count towards the rules. The European Commission late last year proposed a harmonised approach that leaned towards the French model but has yet to legislate it.

Nykredit’s bond includes clauses meaning it can be turned in to a senior non-preferred bond as soon as the the law in the country allows for that possibility.

The issue is the latest example of Europe’s huge primary market for bank bonds reacting to a shift in financial regulation. In April last year, Dutch bank ING similarly issued a bond with provisions that would allow it to adjust in the future.

According to the European Banking Authority, the rules could eventually result in fresh supply of over €500bn across the continent’s lenders if all of them rely on senior non-preferred debt to meet the requirements.

Investment bankers on the deal suggested Nykredit’s approach allows issuers to meet their funding requirements despite delays in the European process.

Moody’s, the rating agency, last week warned investors over uncertainty caused by delays to European regulation. In the US, all banks meet too-big-to-fail requirements by selling bonds through their holding companies

BNP Paribas, JPMorgan, Bank of America Merrill Lynch, Morgan Stanley and Nykredit worked on the deal.