SNS Reaal and SNS Bank were nationalised by the Dutch government today (Friday), but the covered bonds – and senior unsecured debt – are exempt from an expropriation affecting equity and subordinated debt, with the bank’s covered bond spreads tightening considerably in response.

The decision was announced this morning by Dutch finance minister Jeroen Dijsselbloem after close consultation with the Dutch central bank, and comes after efforts to agree a solution to the group’s problems via the participation of private investors failed.

Nationalisation was deemed the only remaining option to safeguard financial stability after all alternative solutions involving market parties had been scrutinised, according to the minister.

“Yesterday night I found myself compelled to conclude that no acceptable total solution was offered,” said Dijsselbloem. “I therefore had to use the instrument of last resort, which is nationalisation. Nationalisation would safeguard financial stability and prevent serious damage to the economy.”

According to the ministry of finance the private sector will have to share the cost of the rescue to the maximum extent that the central bank, De Nederlandsche Bank (DNB), deems justifiable.

The ministry therefore decided to expropriate shareholders and subordinated creditors, which will save the public purse Eu1bn, it said. Savings deposits will be safeguarded.

Senior unsecured debt and covered bonds are not affected by the expropriation, according to documents released by the ministry and analysts.

A technical note on the terms of the nationalisation said that consideration was given to expropriating non-subordinated debt, but that DNB believed this would be irresponsible from a financial stability perspective, for example because of the impact it would have on market access and funding costs for other Dutch financial institutions. The note states that the outstanding senior unsecured debt of Dutch banks is estimated at more than Eu400bn, or almost half of total bank funding and 20% of aggregated balance sheets.

Florian Eichert, senior covered bond analyst at Crédit Agricole CIB, said that the outcome was positive for SNS Bank covered bondholders.

“This looks like a good deal, arguably as good as it could have got for covered bondholders and it seems that business will continue as usual,” he said. “They’re not even touching senior.”

The nationalisation of SNS Reaal will cost the state Eu3.7bn, said the ministry, based on Eu2.2bn in new capital injections, a Eu800m write-down of state aid previously granted to the group, and Eu700m in order to isolate SNS Reaal’s real estate arm.

Losses incurred in a legacy commercial real estate portfolio in the group’s property finance unit were behind the group’s troubles given the threat the losses posed to its capitalisation and profitability.

RBS analysts noted that the Dutch government will also provide Eu1.1bn in loans and Eu5bn in guarantees to secure the group’s liquidity, although no details are available.

SNS Bank has four benchmark covered bonds outstanding, according to the analysts. A syndicate official today said that an August 2017 issue was around 30bp tighter on the back of the nationalisation news, and that it was trading at around 70bp-75bp over mid-swaps bid. Senior unsecured spreads, which are said to have widened much more than covered bonds levels, had not tightened, according to the syndicate official.

Maureen Schuller, head of covered bond strategy at ING Bank, said that a tightening of on average 34bp of SNS Bank covered bond spreads this morning makes up more than double for their widening since last Wednesday (23 January). She said that SNS Bank senior unsecured bonds tightened considerably this morning, albeit with limited liquidity, with 4.625% 2014s and 6.625% 2016 issues some 100bp tighter. [Updated with ING research comment.]

Franz Rudolf, head of financials credit research at UniCredit, said that the outcome of the nationalisation of the SNS group bodes well for the bank’s covered bonds.

“We definitely see SNS covered bonds as an attractive investment option,” he said. “They’re not part of the problems at SNS but have always suffered, from a ratings or spread perspective, as a result of being associated with the group and they offer a large pick-up over ABN Amro and ING covered bonds.”

Another analyst also noted that the premium on offer in SNS covered bonds seemed attractive given strong cover pool data.

SNS covered bonds are rated by Fitch and Moody’s. Fitch on 11 January affirmed SNS covered bonds at AA+, on stable outlook, following a full review of the programme. It has assigned a Discontinuity Cap (D-Cap) of 4 to the programme. According to the rating agency, the breakeven asset percentage level for a AA+ rating had changed from 78% to 76%, mainly driven by an increase in the expected loss calculated on the cover pool, which is in turn explained by decreasing house prices in the Netherlands.

Moody’s rates SNS covered bonds Aa2, on review for downgrade. The rating agency overnight – before the nationalisation announcement – cut the issuer by one notch, from Baa2 to Baa3, and kept the rating on review for downgrade. The downgrade of the issuer rating reflected a cut in the standalone bank financial strength rating, from E+ to E.

RBS analysts said that under Moody’s rating methodology the downgrade of the issuer rating should in theory trigger a downgrade of the covered bonds because there is no leeway under its Timely Payment Indicator (TPI) framework.

Moody’s said that it may upgrade SNS Bank’s rating if it considers that a restructuring plan “would effectively restore the capital of the various group entities and/or immunise the group against future losses in the bank’s legacy property finance portfolio; dissipate the uncertainty on the future of the group and reduce risks of a potential shift in depositor confidence; and does not result in the imposition of material restrictions from the European Commission”.