Nordic Credit Rating (NCR) estimates that Nordic banks will need to issue nearly €100bn in senior non preferred (SNP) debt instruments through 2022 for all banks in the region to comply with existing and expected national regulations for minimum requirement for eligible liabilities (MREL) in accordance with the EU crisis management directive in the Nordic countries. This would entail a 14-fold increase from existing SNP issuance by Nordic banks, but would represent less than half of outstanding senior unsecured debt, which should allow a smooth transition given stable funding markets.
“The fall of 2018 is expected to see a number of new SNP issuers come to market”, says Sean Cotten, Lead Analyst for financial institutions at NCR, and adds “regulators are finalising SNP regulation and banks are preparing investors for coming issuance.”
Thusfar, Nordea Bank, Danske Bank, Nykredit Realkredit and DLR Kredit have received strong demand for about €7 billion in SNP instruments as investors sought larger spreads on senior instruments from strong and well-established issuers. Nevertheless, the market currently requires a 40 basis point premium for SNP over senior unsecured issuance, though we expect increased volumes, liquidity and familiarity to reduce this premium, all else being equal, over the next few years.
At the highest issuer rating levels ('BBB+' or higher), NCR does not think that the risk of an institution undergoing resolution and SNP instruments being bailed in should be indicated by additional notching below the issuer rating (assuming that SNP instruments are eligible for support included in the issuer rating). However, for lower ratings we believe that the risk associated with SNP instruments becomes increasingly material.