Santander cuts sale of riskiest bank bonds to €1.5B from €2.5B

BANCO SANTANDER, parent of Boston-based Santander Bank, is cutting back its planned sale of contingent capital notes to 1.5 billion euros, from 2.5 billion euros. Javier Marin has led the bank as CEO since April 2013. / COURTESY SANTANDER BANK
BANCO SANTANDER, parent of Boston-based Santander Bank, is cutting back its planned sale of contingent capital notes to 1.5 billion euros, from 2.5 billion euros. Javier Marin has led the bank as CEO since April 2013. / COURTESY SANTANDER BANK

(Updated, 10:45 a.m.)
LONDON – Banco Santander SA cut a planned sale of the riskiest bank bonds to 1.5 billion euros ($2 billion) after saying it planned an issue of as much as 2.5 billion euros.

The contingent capital notes from Spain’s largest lender will convert to equity if capital ratios fall below preset levels, according to a person familiar with the deal.

Santander, which has already issued two additional Tier 1 notes this year, is the first major European lender to offer the debt since Societe Generale SA sold $1.5 billion of the securities in June, Bloomberg data show. The Madrid-based lender is seeking to take advantage of a drop in borrowing costs as the debt recovers from a selloff last month that sent yields to a six-month high.

“This is a new market and it’s still developing,” said Mark Holman, CEO of Twentyfour Asset Management LLP in London, which has about $3.9 billion of fixed-income assets. “How deep is it? Not very deep. Santander has already sold Tier 1 bonds so anyone who wants them already has them.”

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The average yield investors demand to hold the notes tumbled 45 basis points since Aug. 8 to 6.42 percent, according to Bank of America Merrill Lynch’s High Yield Contingent Capital index.

HSBC sale

HSBC Holdings PLC is planning an inaugural sale of additional Tier 1 notes. Europe’s biggest lender hired its own investment bank to arrange meetings with global investors, according to a person familiar with the plans, who asked not to be identified because they’re not authorized to speak about it.

“The deal will be big and it will be liquid,” said Holman. “That, not more Santander, is exactly what this market needs.”

Italy’s biggest bank UniCredit SpA is also holding presentations for its second sale of the securities following a $1.25 billion issue in March. UniCredit issued $1.25 billion of 8 percent additional Tier 1 notes in March.

Additional tier 1 bonds are designed to shift a bank’s losses to investors instead of taxpayers. They have optional interest payments and no set maturity, meaning cash outflows can be prevented in a crisis.

“There’s a bit of a rush to issue because rates are so low and it’s very cheap for the issuer,” said Francois Lavier, a money manager at Lazard Freres Gestion SAS in Paris, which manages about $19 billion. “These kinds of securities are in vogue among investors because it’s very difficult to get this level of yield from issuers of this quality.”

Santander’s new bonds will have a coupon of 6.25 percent and can be bought back by the lender after seven years. Its 1.5 billion euros of 6.25 percent notes sold in March fell 0.38 cent on the euro today to 102 cents to yield 5.87 percent, according to data compiled by Bloomberg.

Santander’s securities will automatically convert into stock if the lender’s capital ratio falls below 5.125 percent of assets weighted by risk.

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