What’s red and white and doesn’t redeem itself ’till December?
A Banco Santander LT2 callable bond!
Santander’s announcement last week, that it would not be calling one of its subordinated bonds, has been thrust back into the spotlight after the Friday decision by Royal Bank of Scotland to not call its own Tier 2 hybrid debt. Until recently, these types of bonds, which help make up banks’ regulatory capital, were called, or redeemed, at their earliest call date.
While RBS blamed its non-call on non-approval from the UK’s Financial Services Authority — itself a fallout from the European Commission’s newfound concept of burden-sharing for bondholders — Santander cited some mysterious “administrative reasons” for its non-call.
Here’s a bit more detail, from Danske Markets credit analyst, Henrik Arnt:
Confusion reigned when Santander did not call a LT2 bond. It seems that the issue was a mistake due to summer holidays in both Santander and Bank of Spain (the body that needs to give permission for the call). Subsequently, Santander has stated that it intends to call the bond at the next possible call date (3 months from now). Although a silly mistake or misunderstanding the non-call by such a big player caused some disruption in the subordinated bond market.
The call date in question was for September 30, and Santander had until August 31 to inform the market of its plans with respect to the bonds, €500m of LT2 floating rate notes. The coupon on the debt will now increase to 75bps over Euribor, from 25bps over Euribor.
The next call date is December 30, and it will provide an interesting datapoint as to how far the EC is willing to go in its pursuit of burden-sharing for bondholders. While Santander has not been the recipient of direct state aid, it has benefited from Spanish bank guarantees and liquidity operations.
The EC is keen for bondholders to share some of the pain of state support, and is therefore urging bailed-out banks to defer coupon paymants and/or not call its callable bonds, when it’s legally and economically viable to do so. If the Commission stretches the concept of burden-sharing to include all banks that have received state aid, perhaps above a certain threshold, you can expect even more chaos in the bond market.
Here’s BarCap with its commentary:
[Santander] has not taken state aid in the form of capital injections like RBS but has benefitted indirectly from 5% GDP-worth of guarantees and liquidity support across the Spanish banking system (vs 27% in the UK) - it too wanted to call the LT2 FRN but informed the market that due to some timing issues with the Bank of Spain (holiday season, etc.) it had not received authority to do so.
The rising uncertainty seems therefore to be the extent to which regulators might object to banks that have received state aid calling their LT2. Recall that state aid is quantified as more than 2% of RWA, so the bulk of banks that have received direct government support breach this limit. It is no surprise therefore that ISPIM is now considering alternative options to its planned EUR4bn of Tremonti bonds and LLOY looking at raising fresh equity capital.
Where does this leave the LT2 market? Technically, it still remains quite well supported, in our view: of the EUR700bn of debt issued by Eurobanks since Sept-08, nearly all has been in senior format, with roughly 40 per cent of the EUR200bn LT2 maturing/up for call by the end of 2012. Current LT2 spreads are back inside the pre-LEH levels, though the differential with senior remains at 2x despite issuance being concentrated in the latter.
That said, in light of further inevitable political/regulatory judgement (whether wrongly or rightly, ie KBC reversing the decision to payout on some T1 securities after the EC declared otherwise), profit taking is a distinct possibility for those that have ridden the c25pt rally from the low 70s over the past six months. Into year-end, only 3 bonds remain up for first call – INTNED FRN 14/OCT, STANLN 4.375, and SOCGEN 4.875. Given the current precedence, INTNED is perhaps the sole remaining LT2 bond this year that may not be called at its first opportunity.
Related links:
Hybrid heroes and villains – FT Alphaville
Hybrid security (or not) - FT Alphaville
Deutsche bonds with the retail investor – FT Alphaville