Santander Bond Move unnerves bank debt investors

Spanish lender Banco Santander HER

SAN -1.70%

said on Tuesday it would not repay some sort of risky bank debt, a move analysts said could spill over into a largely untested segment of the bond market.

The bank’s decision not to “repurchase” the 1.5 billion euro ($1.33 billion) bond is seen as the first of its kind in the so-called supplemental Tier 1 bond market. AT1 debt is considered particularly risky because it has a perpetual maturity, leaving issuers free to never repay bondholders.

But until Tuesday, issuers had always redeemed the securities – usually on their first so-called redemption date – as a courtesy to investors seeking the option to sell some of the debt. And the debt category has attracted investors because it tends to pay higher interest than other types of bank bonds.

Santander’s move raises questions about whether investors will start to downgrade AT1s across the board, which could force European banks to rethink a key way they’ve hedged against potentially catastrophic losses since the crisis. global finance.

“It’s a big surprise, the first time a major bank hasn’t called AT1 securities,” said Tom Kinmonth, fixed income strategist at ABN Amro Bank. “It’s a sign that the rest of the market may have to re-evaluate them.”

Michael Strachan, director of media and financial communications at Santander, said the bank made the decision after weighing “the interests of all investors”. In an email, Mr Strachan added that the bank would ‘continue to monitor the market closely and seek to exercise call options where we believe it is right to do so’.

By not redeeming them on their first call date, Santander will leave the bonds outstanding, but switch from a fixed rate to a lower floating coupon rate. This will allow it to end up paying a lower coupon on the debt, 5.54%, than it would when issuing new bonds. The bank this week issued a dollar-denominated AT1 at 7.5%, for example.

Santander bond prices fell on Tuesday, with AT1s due March 12 trading at a spot price of 97.63, down from 98.42 on Monday and 98.87 on Friday, according to Refinitiv.

The bank’s move surprised investors, not only because issuers have historically called the debt AT1, but also because Santander issued another AT1 — one carrying a 7.5% coupon — last week.

“It’s like leading the market thinking they’re going to call the bond,” said Paola Biraschi, senior banking analyst at CreditSights.

Some analysts have warned that Santander’s move could make investors more reluctant to pick up more AT1 issues in the future.

“This will have an impact on banks across Europe. This type of debt will now cost banks more money,” said ABN Amro’s Mr Kinmoth.

But the initial market reaction seemed relatively subdued.

The spot price of Santander AT1s with May redemption dates fell to 98 from 98.5, while those issued by Barclays PLC and Crédit Agricole SA with September redemption dates were either higher on Tuesday or falling. negotiated around the fixed line.

In post-financial crisis Europe, AT1 bonds took off as regulators forced banks to replenish their capital buffers. The bonds – which ABN Amro Bank says are valued at around €125 billion in the European banking sector – offered banks a way to do so without selling new shares or diluting shareholders. And if things went wrong, investors were on the hook.

This is not the first time bonds have been hit. In 2016, a sell-off from European lenders spread to these contingent convertible bonds, or CoCos. At the time, fears that Deutsche Bank AG might not be able to pay interest on its CoCos sent those stocks plummeting. Ultimately, Deutsche Bank issued a statement confirming that it would be able to cover coupon payments.

Write to Akane Otani at [email protected] and Georgi Kantchev at [email protected]

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Carol M. Barragan