Biggest Nordic Bank Drops Exotic $9.7 Billion Deal

Nordea Bank AB, one of the biggest lenders to publicly embrace complex capital relief deals, has cooled on such transactions as new management focuses on the bank’s costs, people familiar with the matter said.

The Stockholm-based bank had been structuring a trade that would have seen investors take on some of the risk on about 8 billion euros ($9.7 billion) of corporate loans, one of the people said, asking not to be identified as the details are private. Nordea dropped those plans as it embarks on an overhaul to eliminate 6,000 jobs and after head of treasury Tom Johannessen left in November, the people said.

A number of European banks are using capital-relief trades, also known as synthetic securitizations, to reduce the amount of funds they must hold as buffers against loan losses. While critics of the opaque deals say they add complexity to the financial system without significantly reducing risk, proponents — including top Nordea executives — have lauded them as a way of meeting tougher rules introduced after the 2008 credit crisis.

“We have the possibility of carrying out synthetic securitization transactions and that possibility remains,” Rodney Alfven, head of investor relations for Nordea, said in an e-mailed statement. “This is a tool in our risk and capital management toolbox, approved by the board, which we can use when we find it appropriate.”

Alfven declined to elaborate on specific transactions.

Johannessen, a former trading executive at Barclays Plc and Lehman Brothers Holdings Inc., had helped lead the efforts to prepare the deal before his departure in November, the people said. Chief Financial Officer Heikki Ilkka also quit that same month for a role with Ernst & Young.

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Nordea worked with JPMorgan Chase & Co. to help arrange the deal, in which the Swedish lender would use derivatives to transfer the risk of losses on about 400 million euros of the 8 billion-euro portfolio to investors, the people said. The loans themselves would stay on the bank’s balance sheet, the hallmark of a synthetic securitization, the people said.

While the trade would cut Nordea’s requirements under capital rules, the bank would also have to make annual interest payments of about 40 million euros to investors, one of the people said. This bothered some executives as the lender began focusing more on cutting costs, the person said.

Capital-relief trades are an increasingly popular part of the debt market because they help banks meet tougher capital rules without having to find buyers for large portfolios of loans. Investors who agree to shoulder the risk of potential losses, meanwhile, can often make double-digit returns. Lenders in Europe carried out 94 billion euros of synthetic securitization deals in 2016, compared with 20 billion in 2013, Deutsche Bank AG wrote last year.

In 2016, Nordea completed a synthetic securitization deal tied to 8.4 billion euros of loans in what was a milestone deal for the Nordic region. Top officials, including Johannessen and Chief Executive Officer Casper von Koskull, heralded the deals and predicted that more Scandinavian banks would use them to meet tougher rules.