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Bloomberg

Saxo Bank A/S learned from its sale of additional Tier 1 debt that some investors are starting to question the product and would rather buy Tier 2 bonds, according to its chief financial officer.

The Danish bank issued 42.5 million euros ($53 million) in Tier 1 contingent capital this week at a 9.75 percent coupon with a first call date in 2020 and a conversion trigger of 7 percent equity relative to its risk-weighted assets.

Steen Blaafalk, who joined Saxo as CFO after working as head of Treasury at Danske Bank A/S -- the first Danish lender to sell additional Tier 1 notes in March -- says the sale demonstrates Saxo can find buyers for bonds he describes as “not an easy and investor-friendly product.”

Saxo is the smallest bank in Scandinavia to tap the market for additional Tier 1 capital -- debt that converts to equity or is written down if buffers breach pre-set levels -- as lenders look for cheaper alternatives to equity to build reserves. Denmark’s regulator has already warned banks against selling the debt to consumers while the U.K.’s Financial Conduct Authority has placed a ban on their sale to retail investors.

The skepticism toward additional Tier 1 notes means Saxo’s next sale of contingent convertible debt may be in the Tier 2 segment, Blaafalk said. That’s a category that only gets wiped out after Tier 1 if a lender becomes insolvent.

‘Get In Touch’

“The possibility for Tier 2 debt is much better after this,” Blaafalk said. “We’ve talked to investors who have said they aren’t buying AT1, but said to get in touch if we’re issuing something else in the future.”

Other issuers in Scandinavia say there’s still ample demand for the riskiest CoCos. Danske may consider selling more Tier 1 contingent capital after receiving bids for 17 times the amount it offered in March, Chief Executive Officer Thomas F. Borgen said last month. “There seems to be great interest,” he said in an Oct. 30 interview.

The bid-yield to the next call date on Danske’s 5.75 percent additional Tier 1 note rose to about 5.45 percent yesterday from a low of about 5.2 percent at the beginning of the month. The average yield, by that measure, since the note was first sold eight months ago, is 5.26 percent, according to data compiled by Bloomberg.

IPO Thoughts

Like other Nordic banks to have issued additional Tier 1 bonds, Saxo opted for a debt write-down model instead of equity conversion because “we didn’t want to complicate things by introducing features that have to be digested and speculated on,” Blaafalk said. “The profile is more or less like Danske’s, which has been absorbed by the market.” The debt can be written up once capital buffers are replenished.

Saxo wants to maintain ample regulatory reserves to be “more attractive to major clients and white-label partners since they look for our continuous existence for the long run,” Blaafalk said.

Saxo has about 500 million kroner ($84 million) in capital that “will not be compliant in due time since it is being phased out, which leaves us with core equity,” he said. That “is fine but it’s not very cost effective.”

Creating footholds in a variety of capital markets will help the bank build reserves even if times grow tougher, Blaafalk said.

“This is more to ensure the future strategic growth of the group. We are a small institution and the window might not be open all the time for small institutions as it is for the majors,” he said. “Looking back on the past five years, the market hasn’t always been open, even for the majors.