Danske’s $10bn in issuance targets Japan, US buyers
August 08 2015 10:02 PM

An exterior view of the Danske Bank headquarters in Copenhagen. Denmark’s biggest bank wants to tap growing investor demand from Asia and the US as it issues as much as $10.2bn in funding instruments this year.


Denmark’s biggest bank wants to tap growing investor demand from Asia and the US as it issues as much as $10.2bn in funding instruments this year.
Danske Bank, which last month revealed it was returning to the US commercial paper market after a ratings upgrade, says it has been approached by investors as far afield as Japan. Demand for its US money-market product is helping the bank spread its funding risks across more regions and currencies, said Christoffer Mollenbach, head of treasury at the Copenhagen- based bank.
Danske is about half way toward reaching its 2015 issuance target. Aside from helping meet loan growth, the funds will let Danske restructure its liquidity buffer after stricter regulations prohibited banks from using their own securities for that purpose. Refinancing older debt means Danske can shift into lower interest rates than those on existing notes. The move will help it cut costs, improve net interest income and raise investor returns, Mollenbach said in an interview.
“We still have outstanding bonds issued at high spreads during the crisis that we have to refinance,” he said. “Our funding programme for the year, a chunk of that, is refinancing previous deals, and similarly next year. The bonds that are maturing have higher spreads compared to our current issuance levels, so we are going to continue to see that flow into our funding costs.”
Since Thomas Borgen took over as chief executive officer in 2013, Danske has focused on cutting its debt risks and improving its credit profile as part of a strategy to reduce its funding bill. The bank was upgraded twice by Moody’s Investors Service this year, bringing the issuer to A2. Standard & Poor’s rates the bank A. At the height of the financial crisis, Danske’s ratings had plunged to their lowest in almost two decades - Moody’s had the bank at Baa1 in 2012.
Market prices signal a narrowing gap between Danske’s funding costs and rivals’.
The spread between the yield on Danske’s 0.75% note due 2020 and the implied government yield curve has shrunk, to 36 basis points from around 44 basis points after it was offered in May.
Then, just three among 19 comparable bonds had wider spreads, according to data compiled by Bloomberg. Now, just four have narrower ones.
The improvements are feeding through into Danske’s credit- default swaps, insurance contracts whose price reflects investor perceptions of an issuer’s safety.
It now only costs 11 basis points more to guard against the risk of default on Danske notes than it does for debt issued by Nordea Bank AB, Scandinavia’s biggest bank. Back in 2012, that difference was almost 180 basis points.
“We’ve printed almost half a billion of US CPs since the half year report came out” on July 22, even though the program’s relatively small size limited the number of possible investors, Mollenbach said. “We’re starting to see investors come to us and look for our credit in these slightly further- away markets, and that’s very much driven by the ratings,” he said.
Danske may opt to expand its US sales “if the interest continues,” Mollenbach said. Under the US programme, the bank can offer commercial papers with maturities as long as nine months, or three times its other short-term options. That means more stable funding and lower costs, Mollenbach said. “But if we were to increase it, what we would want to do is reduce other sources of short-term funding,” he said. “We are not looking to increase our overall short-term funding, but rather to diversify a little bit and make sure that we get a diverse investor base.”
Though Danske’s funding costs have dropped to levels previously only enjoyed by Sweden’s biggest banks, the Danish lender still lags behind its Scandinavian rivals in delivering shareholder returns. Danske targets a return on equity of more than 12.5%, compared with the 15% Nordea says it can reach.
“It’s been good so far but obviously we need to continue to improve,” Mollenbach said. “We still have a ways to go before we consistently meet our long-term return target. There is still work to be done.”

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