Nationale-Nederlanden Bank (NN Bank) is seeking to convert its conditional pass-through covered bonds into soft bullets and to terminate its old programme, in a move that could benefit holders of the outstanding securities and represents an acceleration in the decline of the CPT segment.

NN Bank flagged its initial move to soft bullets in May 2020 and inaugurated its new €7.5bn programme the following month. Since then, all other Dutch CPT issuers – Achmea, Aegon, NIBC and Van Lanschot Kempen – have either inaugurated soft bullet programmes or indicated their intention to focus on soft bullets for benchmark issuance.

NN Bank is now going one step further, seeking to switch its outstanding CPT benchmarks and other issuance over to its soft bullet programme and to shut down the old €5bn programme under a consent solicitation launched yesterday.

“If the solicitation is indeed successful, almost 25% of the Dutch CPT universe will disappear in the blink of an eye,” said Rabobank analysts, “accelerating the shift away from CPT towards actively reducing outstanding bonds, as opposed to no longer issuing new bonds, and more issuers could potentially follow suit down the line.”

NN Bank has seven CPTs outstanding totalling €2.595bn, of which €2.550bn comprises five benchmarks. Under the proposed changes, the guarantor for the covered bonds would switch from the CPT programme’s to the soft bullet programme’s, while the extended due for payment date would be amended from 32 years after the maturity date to one year after.

“The issuer wishes to reduce its operational burden and the operating costs of simultaneously maintaining two separate covered bond programmes, whilst only the soft bullet covered bond programme will be used for future issuances,” said the bank.

S&P, which rates NN Bank’s CPT and soft bullet covered bonds AAA, said that the proposed amendments would not in and of themselves result in a change to its ratings. It noted that part or all of the cover pool assets that currently form part of the CPT programme would be transferred to the soft bullet programme.

The consent solicitation in respect of the proposed move is programme-wide, in that votes will be counted in aggregate across the seven series, rather than being held on a series-by-series basis. Hard to soft bullet conversions were typically handled on a series-by-series, since the two can co-exist within the same programme, but the mechanics of CPTs prevents them from existing alongside soft bullets.

The expiration deadline is 6 April, with a bondholder meeting scheduled for 8 April, but those responding by an early instruction deadline of 30 March will receive an early participation fee of 2.5 cents. The initial quorum is 50% of the aggregate principal amount outstanding of all series, with no minimum required at an adjourned meeting, and a two-thirds majority in favour of the resolution is required. Credit Suisse and Rabobank are solicitation agents, and Lucid Issuer Services is tabulation agent.

Hard to soft bullet conversions, as well as soft bullet to CPT, have at times been contentious, but NN Bank’s proposed conversion is not expected to prove controversial. Rabobank’s analysts highlighted benefits for investors in addition to the early participation fee and the reduction in extension risk.

“It definitely doesn’t hurt that the ECB is added to the list of possible buyers once the conversion is completed,” they said. “Finally, there is in our view some upside potential in terms of capital gains/spread tightening, as logically the CPT bonds should (eventually) trade tighter in anticipation of conversion to the soft bullet format, whose bonds trade inside the equivalent CPT ones.

Market participants have suggested that other Dutch issuers could, again, follow NN Bank’s lead and launch similar conversions. However, a DCM banker noted that they could also choose to keep their CPT programmes for central bank-targeted issuance, with some other issuers already having CPT programmes exclusively for this purpose.