Danske Bond Sale Is Upended as Laundering Case Keeps Growing

(Bloomberg) -- Danske Bank A/S had set aside this week to talk to bond investors and persuade them to buy its debt despite its role in Europe’s biggest money laundering scandal. The bank knew it was going to have to pay a bit more, but had braced itself and just wanted to get started.

But then, a string of bad news upset that agenda.

Denmark’s biggest bank is at the center of a $230 billion dirty money case, with multiple criminal investigations already under way and potentially hefty fines ahead. Now, investors are facing more bad news. On Thursday, Hermitage Capital Management founder Bill Browder is planning to present “new information” on the laundering case during a briefing in the Danish parliament. That comes amid news that Danske is being sued by a U.S. pension fund over the case.

Danske Bond Sale Is Upended as Laundering Case Keeps Growing

Against that backdrop, Danske has decided to delay its planned bond issuance until there is more clarity on what emerges from the Browder briefing. “With massively oversubscribed books, the responsible thing to do as an issuer was to put the bond sale on hold and wait until what comes out of the press conference, ” Christoffer Mollenbach, head of treasury, said in an interview Thursday. “I’m hoping we can make the decision today on whether to proceed with the bond sale or not,” he added.

Shares in Danske, which slumped 47 percent last year, fell as much as 3.7 percent on Thursday, putting the bank on course for its worst trading day so far in 2019. Both Deutsche Bank and RBC Capital Markets lowered their price estimates for Danske in sector reports on Nordic lenders published on Thursday.

The Cost

On Wednesday, Danske started marketing two benchmark-sized tranches of non-preferred senior notes in U.S. dollars with maturities of three and five years, according to the person familiar with the issuance, and was set to pay up considerably more than it did for similar notes just last year.

The bank is said to have been offering the five-year notes at 285 basis points above rates on U.S. treasury bonds Wednesday, compared with just 120 basis points on a similar maturity bond last year, before investors had absorbed the full scale of the laundering case.

Danske acknowledged earlier this week it expects the scandal to increase the cost of borrowing for the bank. “We’ll be paying up and we understand that,” Mollenbach told Bloomberg then. He also said the bank had invested a lot of time to talk to clients and investors to assuage their concerns about the fallout of the laundering scandal.

Danske wants to issue 40 billion kroner ($6.1 billion) in non-preferred senior notes this year, which will make up roughly half 2019’s total debt issuance, in an effort to meet European requirements for debt that can be bailed in.

Digesting the Scandal

Investors spent much of last year trying to keep up with the constant barrage of bad news around Danske. Just before the end of the year it issued a profit warning due to weak markets. In the laundering case, preliminary charges have been brought against the bank in Denmark. And Estonian police detained 10 former Danske employees suspected of knowingly helping criminals from Azerbaijan and Georgia launder their money.

The scandal cost Danske almost half its market value in 2018. Estimates for fines have ranged from below $1 billion to over $8 billion. Danske was told by its regulator to have at least $1.5 billion extra in so-called Pillar 2 capital to handle the fallout of the scandal, but the bank had almost double that amount late last year and is continuing to build the surplus buffer. It can also draw on other reserves, and the regulator has made clear it considers the bank well capitalized.

Waiting for a CEO

Meanwhile, investors are waiting to learn who will run the bank on a permanent basis. Thomas Borgen was ousted as chief executive officer for his role in the scandal, but the board’s preferred candidate to replace him was rejected by the regulator. Danske’s former head of its Danish banking operations, Jesper Nielsen, is serving as CEO on an interim basis.

The biggest concern that the bank has had to address is whether its core business will be hurt, Mollenbach said.

“The feedback from most investors has been that as long as the core franchise is there, we should be able to absorb a fine,” he said. “That’s their conclusion, because we can’t say anything about the fine.”

Barclays Bank Plc, Bank of America Merrill Lynch, Danske Bank AS, Goldman Sachs Group Inc, JPMorgan Chase & Co and UBS Group AG were hired to arrange the sale.

©2019 Bloomberg L.P.