Norway's DNB Bank has launched a liability management exercise on three discount perpetual securities, or discos, seeking to de-link their coupons from Libor to instead reference SOFR, as it holds on to the legacy notes for funding purposes.
The legacy instruments were issued in the 1980s with coupons that reference three-month or six-month US dollar Libor and lack sufficient fallback language for the rate's demise.
Through the liability management exercise, DNB is seeking bondholders’ consent to amend the terms of the bonds so their interest rate is calculated using compounded daily SOFR.
If bondholders do not give their approval, synthetic US dollar Libor will be used to calculate the interest rate.
DNB had counted the bonds, which add up to a combined US$565m, towards its Tier 2 capital up until this year. The European Banking Authority said in January that the notes cannot count as fully eligible Tier 2 instruments and should in fact have been grandfathered more than three years ago, after scrutinising their terms and conditions.
The EBA has warned of the so-called infection risk posed by legacy bonds to banks' capital stacks should issuers enter resolution. It has urged banks to redeem, repurchase or amend the bonds where possible and said they should keep them outstanding only as a last resort.
The Norwegian finance ministry has proposed that the country implement Bank Recovery and Resolution Directive rules that would mean the discos rank between Tier 2 and senior non-preferred.
DNB said that it expects the proposed amendment to the law to solve the infection risk issue and intends to keep the bonds outstanding as regular funding. Bankers said the bonds will still provide attractively cheap funding for the issuer.
The consent solicitation expires on August 22, with bondholder meetings scheduled for August 24. BNP Paribas is the solicitation agent and Kroll Issuer Services is the tabulation agent.
DNB's desire to keep hold of its discos contrasts with recent decisions from lenders such as HSBC, Barclays and Standard Chartered, which have exercised call options on their discos in recent months.
Elsewhere in the legacy capital space, Bank of Ireland announced on Tuesday that it has extended the acceptance period for institutional investors for tender offers on four of its sterling or euro-denominated perpetual instruments until August 2 – in line with the deadline for retail investors. The deadline for institutional investors had previously been set on June 29, with results announced on June 30.