US scrutiny of Danske case changes everything for lender’s investors

Bloomberg

The Estonian laundromat scandal has been on Danske Bank A/S investors’ radar for more than a year. But last week, everything changed.
News of a US Department of Justice investigation has caused panic. The bank’s shares were dumped and some bondholders are even wondering whether Danske might start having trouble making interest payments on its riskiest debt.
At Swedish hedge fund Trude, asset manager Anders Nordborg says he’s dropping holdings in Danske’s euro-denominated contingent convertible note, or CoCo, after learning of the US probe.
“We weren’t very worried after our initial assessment, as it showed that Danske Bank would still be able to make good on its coupons” provided a potential fine didn’t exceed about 8 billion kronor, or roughly $880 million, he said. But now, “there is
no limit to the size of a possible claim from the Department of Justice.”
The scale of the bank’s Estonian money laundering scandal has shocked the world. Over a nine-year period, about $235 billion flowed through a tiny unit in the Baltic country, much of
it suspicious, Danske said
last month.
Besides the US probe, Danske is being investigated in Denmark, Estonia, Switzerland and the UK Separate investigations will examine the extent to which the bank’s regulators and auditors acted appropriately.
Danske may now be facing fines well in excess of $1 billion, according to numerous analysts tracking the bank. But that figure could be as high as $7.7 billion now that US authorities have entered the scene, according to Simon Hagbart Madsen, an analyst at Jyske Bank.
Yields on some of Danske’s CoCo bonds soared to a record last week, reflecting investor fears. But holders of less risky debt instruments also reacted. The spread on Danske’s senior non-preferred bonds widened as much as 12 basis points at the end of last week. Creditors now demand more than 40 basis points extra to hold Danske instruments, compared with peers, according to the bank’s own estimates.
Danske shareholders last week suffered their worst losses since August 2011, with the stock dropping 12 percent. The bank’s market value has plunged almost
40 percent this year, putting
it neck and neck with Deutsche Bank AG for the title of Europe’s worst financial stock of 2018.
Danske says it’s cooperating with all the relevant authorities and that it doesn’t expect the US to cut it off from the country’s financial system, a penalty that would
severely cripple the bank.