Santander is preparing to repay a €1.5bn bond that briefly rattled the $200bn market for riskier bank debt last year.
The Spanish lender sparked confusion among investors in “additional tier 1” (AT1) bonds in February 2019 when it opted not to repay one of its equity-like securities at the first available opportunity, despite raising new funds.
But on Thursday, the bank said it would raise new AT1 debt at a lower cost, and would repay the disputed bonds in March. The lender, which is classed as a global systemically important bank, said it had approval from the European Central Bank to repay, or “call”, the bond.
AT1 bonds, which can be written off in times of stress, were introduced by regulators after the financial crisis to shore up banks’ balance sheets. While such bonds have a perpetual maturity, meaning that they never have to be repaid, Santander was the first bank not to call the debt when the opportunity first arose, arguing it did not make economic sense to repay the bonds at that time.
“Everything about it was weird,” said Jérôme Legras, head of research at Axiom Alternative Investments. He noted that months later Santander called a different bond despite it having a lower cost than the one it earlier deemed uneconomic to repay.
The decision not to repay the €1.5bn bond last year wrongfooted many investors and triggered fears of a sell-off across riskier bank debt, but the wider AT1 market took Santander’s decision in its stride. These types of bonds went on to post their best annual performance on record, with the ICE BofA contingent capital index notching up a total return of more than 17 per cent in 2019.
European regulators have indicated that financial institutions should not redeem their AT1 bonds if the borrower has to replace it with more expensive debt. Santander is set to issue new bonds at a 4.375 per cent yield, well below that of the 6.25 per cent AT1 it is repaying.
Santander’s decision to issue a new $1.2bn AT1 in February last year, at a time of weak demand for these risky securities, gave many investors the false impression that the lender was rushing to raise funds needed to call its existing bond. The bank also kept the market guessing until the last minute, finally announcing it would not repay the debt hours before a legal deadline.
Santander’s new bond sale on Thursday received about €7.5bn of orders from investors, in contrast to the sluggish demand it saw ahead of the call decision last February. Santander struggled to sell that $1.2bn AT1 deal, meaning banks managing the debt sale had to hold some of the bonds on their own balance sheets.
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