Investors Wild About CoCos Drive Nykredit to Mull More Sales

May 27, 2014 7:28 am ET

(Updates with Danske AT1 yield in fifth paragraph.)

May 27 (Bloomberg) -- Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, is considering selling more contingent convertible debt after its first issue of the notes was snapped up by investors eager for more.

“Investors are very interested in these bonds,” Chief Financial Officer Soeren Holm said in a telephone interview. “We’ve done what we’re supposed to do now on refinancing. We won’t have to address whether to replace more hybrids for another year, but if conditions are equally favorable, we may be tempted to sell more CoCos.”

Nykredit sold its first Tier 2 CoCos on Friday, offering investors a 4 percent coupon for a 600 million-euro ($818 million) note due 2036 with a 2021 call option, the Copenhagen- based lender said yesterday. Investors across Europe bid for five times the amount offered, it said.

Nykredit is Denmark’s second major bank to sell contingent convertible debt after Danske Bank A/S, the nation’s largest lender, sold 750 million euros in additional Tier 1 notes in March. Back then, investors sought to buy 17 times the amount on offer. Standard & Poor’s a month later raised the note to investment grade.

The yield on Danske’s AT1 fell to about 5.46 percent as of 1 p.m. in Copenhagen today, from about 5.5 percent yesterday, according to data compiled by Bloomberg. The spread relative to the government yield curve narrowed five basis points to 463, the smallest difference since May 14.

Costly Hybrids

Fitch Ratings and S&P have both assigned Nykredit’s CoCo an investment grade rating. Nykredit’s CoCos will be written down and canceled if a 7 percent capital adequacy requirement is breached, Holm said.

The lender, which has a stable issuer rating of A at Fitch, a negative A+ rating at S&P and an unsolicited stable Baa2 rating at Moody’s Investors Service, won’t have the same coupon deferral option that Danske’s additional Tier 1 note carries.

Investors “clearly preferred” the coupon construction and wanted to have a note that would be redeemed rather than finding themselves “being left with the bond forever, which is often the risk with hybrids,” Holm said. Selling perpetual hybrid notes would have cost Nykredit an extra 150 basis points on the coupon, he said.

“On the other hand they were happy to risk getting written down.” The bank was overwhelmed by “very, very far-reaching attention from institutional investors around Europe,” he said.

Nykredit is also shelving its plans to sell preference shares, Holm said.

“We have no plans to issue preference shares for now,” he said. “It would be much more expensive to issue such shares.”