Issuing Euro-based mortgage bonds under Danish law: What are the benefits?
Now that we have real-world examples of issuing Euro-based mortgage bonds under Danish law with VP Securities, the question arises of whether or not it makes sense to do so. Are there significant advantages to issuing these securities under Danish law? We spoke with the legal team involved in Nykredit’s issuance of Euro-based mortgage bonds under Danish legislation to find out.
Advantage #1: The cost savings“Our primary advantage was the cost savings,” states Jimmy Bak, Head of Legal, Funding at Nykredit, who issued Euro-based mortgage bonds under a Danish law prospectus through VP Securities back in 2017. “There was a significant cost savings for us to have a Danish law prospectus instead of one based on English law. Even though you could use Danish law for some of the security-related aspects of the prospectus, you would still have to go with an Ireland- or Luxembourg-based regulator. You would also need to engage external counsel to maintain the program. So handling everything under Danish law saves money.” According to Jimmy Bak, the prospect of cost savings is not to be underestimated. “When we issue debts, we don’t want to pay extra for it, if we can avoid it, so it’s an important benefit.”
Advantage #2: A simpler process
From the legal perspective, issuing Euro-based securities under a Danish law prospectus also creates a simpler process. This is what Tobias Linde, Partner at Gorrissen Federspiel, has experienced. “It makes the process simpler because it means having fewer advisors and external counsel involved. The documentation is also closer to your own home base.”
As the closest external advisor to Nykredit in their issuance process, Tobias Linde experienced these benefits first hand. “The process was more within our own control. We were the ones drafting the prospectus and taking the discussions with the regulator who has to approve the prospectus. That process is different with an international prospectus, where it would be English lawyers doing the approval process.”
The simpler process had more benefits. “Our second main benefit was that we were able to use our regular infrastructure,” comments Jimmy Bak. “We can issue the bonds ourselves, and it’s a more hands-on procedure.” This simpler process is also a more transparent process. Previously, many issuers experienced the prospectus development process as a bit of a black box, as so much of it took place outside of their four walls and outside of the country. By taking care of the process in-house and in-country, the entire process becomes much more transparent.
Denmark: the go-to country in a post-Brexit world?
The discussion of whether or not to issue Euro-based securities under Danish law comes at an interesting time in the international financial markets. The fact that the UK is exiting the European Union has caused many issuers to consider changing their established practice of developing prospectuses based on UK law. “Even issuers that have been working under English law for a long time, are considering changing the terms of the securities they issue from being on English law to Danish law,” Tobias Linde observes. “We have seen some that have changed, and we expect to see more change going forward.”
“Financial institutions get questions from the Danish FSA, they get questions about Brexit when they issue securities, about whether or not the capital is eligible when based on English law. So it’s clear that they are considering other options,” he relates. And for financial institutions, switching from UK to Danish law is not as complicated as one might think. “It’s not a very big exercise,” says Tobias Linde. “There are a few things related to the terms and conditions that have to change.”
What if you’re appealing to an international investor pool?
The primary concern that some might have is whether or not they can appeal to an international investment pool when the security is issued under Danish law. “In the beginning, you had the question of whether or not it would make it potentially more difficult to raise funds when you need them,” states Tobias Linde. “We had relatively limited examples of Danish issuers that have an international investor base who had chosen to go the Danish route, so you can understand the hesitation.”
However, when it came down to it, this didn’t prove to be an obstacle for Nykredit. “There wasn’t really any big issue after all. Once investors get used to how things are, then there are very few questions. It doesn’t come up as often now,” observes Tobias Linde. Jimmy Bak agrees that their main concern was how international investors would react to the mortgage bond being issued through VP Securities. “When we found out that the investors weren’t concerned about that, it made the choice quite easy,” states Jimmy Bak.
The way forward
Considering the simplified process and cost savings, as well as the uncertainties raised by the UK’s impending exit from the EU, Tobias Linde believes that the trend of issuing Euro-based securities under Danish law will continue. “I think we will see more issuers develop prospectuses based on Danish law.” Jimmy Bak agrees. “We might have paved the way for other issuers to take the same approach rather than going abroad.”
About issuing with VP Securities
At VP Securities, we can work with you on an existing prospectus based on UK legislation, or develop an entirely new prospectus based on Danish legislation. Read more here.