For much of 2011, tier two capital from banks was swept into the no-go pile alongside hybrid tier one. There just simply was not enough clarity, bankers said. The regulators needed to give more guidance about the structure of how instruments should behave under Basel III and CRD IV before banks could issue compliant transactions.
But in February 2012, Nordea broke the supply hiatus which had lasted some eight months. The 10 year tier two security it launched was carefully structured and breathed new life into the market for such instruments in Europe.
Nordeas deal ran a fine line between balancing the uncertainty that came with yet-to-be finalised capital regulations while keeping the structure conservative enough to attract institutional accounts.
The absence of a step-up at the call date was the first feature to catch attention. After step-ups had fallen out of regulatory favour, most banks had turned to bullet structures instead. So to bring a deal with a call date after five years, but no accompanying coupon increase, was a brave move. While the structure had been previewed a couple of months earlier in an exchange offer from Lloyds, this was the first deal to entice new cash into non-step tier two.
Meanwhile, the deal came with substitution and variation language and a regulatory call at 101% of par. This was Nordeas effort to bullet-proof the trade against regulatory uncertainty.
On the one hand, the bank has some scope to amend the terms of the security to make it comply with any changes to the CRD IV framework that have not already been flagged in drafts of the legislation. The European interpretation of Basel III, which was due to begin implementation in January 2013, was working its way through the legislative process as this trade was launched.
The variation provisions come with the caveat that they cannot materially adversely affect investors. If the bank wants to make bigger changes, it has the option to call the bond at 101% of par but, only if CRD IV rules mean the security will not be eligible otherwise.
The deal was an unreserved success. Investors piled in: 350 accounts placed 4bn of orders. Asset managers made up the bulk of the buyer base, taking 57% of the deal, with banks, insurers and pension funds also taking sizeable allocations.On the back the strong secondary market performance, DNB Bank and Pohjola brought their own variations on the theme. Structuring a deal with so many variables does not appeal to every issuer and, indeed, nor does the market appetite for such deals extend to every borrower. But Nordeas landmark showed that for the right borrowers it was possible to delicately balance the regulatory unknown with a saleable structure.