Danske Starts Investor Talks Amid $12 Billion Debt Issuance Plan

(Bloomberg) -- The bank at the center of Europe’s biggest money laundering scandal will test the market’s interest in its debt this week.

On Monday, Danske Bank A/S will start talking to investors in the U.S. and Europe about selling them non-preferred senior notes. Danske plans to issue as much as 40 billion kroner ($6.1 billion) in the securities in 2019. It’s a major chunk of the bank’s total funding plan of up to roughly $12 billion for the year, Christoffer Mollenbach, head of treasury, said in an interview.

The roadshow will be unlike any other Danske has undertaken for debt holders. Investors are still digesting the full scale of the bank’s $230 billion dirty money scandal. It’s alleged that a Danske branch in Estonia was the main vehicle in Europe through which suspicious funds from the former Soviet Union made their way into the West until as recently as 2015. The U.S. Justice Department is investigating the case, and investors fear that Danske faces significant fines, potentially in the billions of dollars.

Danske knows the scandal means debt financing will now be more costly for the bank. “We’ll be paying up and we understand that,” Mollenbach said. “The spreads have widened generally and, secondly, our non-preferred senior trades wider than our peers in the secondary markets.”

Danske’s total debt issuance target for 2019 -- between 60 billion kroner and 80 billion kroner -- is the same as last year’s. Mollenbach says the bank will probably land at the high end of that range. It needs the non-preferred senior notes to meet European requirements for debt that can be bailed in.

A Lot of Bad News

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.

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 bank has held dozens of meetings and calls over the past months and plans to do more to stop customers and investors from fleeing. Mollenbach says he’s hoping investors take note of the surge in employees now tasked with catching financial crime, with compliance staff now at around 1,300 compared with 350 in 2015.

“We’ve been wanting to engage with investors to make sure they have the full picture before we go into the market,” Mollenbach said.

Surviving the Fallout

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

While some customers have left the bank, the impact on lending and deposit volumes has been so small as to be imperceptible, according to Mollenbach.

“If you look at it versus the total customer base, the actual outflow has been so small that we haven’t been able to see it in our deposit numbers or our lending numbers,” he said.

Preparing for Fines

Danske hasn’t set aside provisions for a potential fine, but is trying to prepare for whatever might come through its capital management.

“The timing of a potential fine and the size of a potential fine is difficult for us to speculate about,” Mollenbach said. “We’ve seen wild speculations in the market, but unfortunately that’s an area where we cannot provide any guidance. We haven’t included anything in our accounts yet, because we don’t have enough visibility and clarity.”

Danske has mandated BofA Merrill Lynch, Barclays, Danske Bank, Goldman Sachs & Co. LLC, JPMorgan Chase & Co. and UBS Investment Bank to arrange a series of investor meetings and calls in the U.S. and Europe starting on Monday.

The bank didn’t want to take the risk of waiting with its funding program.

“It’s early in the year, we know we’re going to have to pay up at some point,” Mollenbach said. “We’ve completed last year’s funding budget. We were happy we were early then, and I think we just want to get started.”

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