Santander Relegates Itself to AT1 Division Two

The big news yesterday came from Santander, when the Spanish lender finally announced, just a few minutes before the deadline expired, that it wouldn’t be calling its 6.25% AT1 on the first call date of March 12.

Despite a number of news agencies describing this as a big surprise, it really wasn’t. Every investor in the AT1 market knew this bond was at risk of non-call; no matter which camp you were in, when Santander didn’t announce a call after rushing out a new 7.5% dollar AT1 on February 6, a call was never more than a 50-50 possibility.

The market reaction was fairly muted, with the bond in question dropping by around a point to a mid-price of 97.30 after the news broke on Tuesday, but now back to virtually unchanged this morning.

So, much ado about nothing?

Well, yes and no.  As I mentioned, this was a well-known event so the bonds were not trading as a bond that was expected to be called – the possibility of a non-call was not 100% in the price, but it was certainly being reflected.  In addition, there are other Santander AT1 bonds outstanding and those with a reversionary rate on the low side also traded off in sympathy, and are likely to continue to trade with the possibility of a non-call hanging over them.

There is also the issue of the way in which Santander went about this. Its communication was particularly poor, and some of its actions were downright strange.

Quite apart from rushing its new dollar AT1 out the door – with an unusually short two-day settlement period that further heightened expectation of a call on the euro deal – the bank brought the new deal in dollar format, making it very attractive to Asian investors (who were on holiday) and perhaps US investors, who weren’t able to participate as the book was closed before US markets opened.

Add to this the fact that all investors and strategists expected the last call date to be Friday, February 8, until Santander pointed out, on that Friday, that it believed the last call date was in fact Tuesday, February 12. Quite why an issuer would bother pointing this out when they weren’t intending to call is beyond us.

Lastly, the definite no-call announcement that they wouldn’t call at around 4.30pm on Tuesday; again, if you know you aren’t calling, why leave this announcement to the last minute?  Calling “permanent” capital is not something you decide in a day – you need board approval, not to mention regulatory approval, and the process takes weeks, not hours.  We can’t imagine Santander has won many friends with its woeful communication. Indeed, with ESG such a growing topic for the investor community, Santander’s “G” will quite rightly come under scrutiny.

One interesting point is that the Bank of Spain has not yet authorised Santander to count its new 7.5% dollar deal as AT1 capital, leading some to speculate that once this is done, the 6.25% euro bond could be called at the next call date in June – this is plausible, in which case the ‘will-they, won’t-they’ merry-go-round could continue for another quarter.

With regard to the read across to other bonds, the reaction has been very muted. Bonds with low reversionary rates might come under increased scrutiny, but most banks are expected to be keen to protect their reputation for calling bonds, and therefore benefit from being able to issue bonds with lower coupons in the future.

What long term impact this has on Santander’s spreads, and whether the non-call proves to be sensible or not, will be determined over the coming months and years. Whether Santander can repair its call reputation – that is of course if it wants to – is also uncertain. If you wanted to be cynical, you could speculate that the bank never intended to call the 6.25% euro bond, and rushed out the new dollar deal to raise expectations that a call was imminent and create a better pricing environment in the immediate aftermath.  They can squash that story with a call in June, so we’ll see.

What is now certain is that we have a two-tier AT1 market, with Santander firmly in the second tier, which we would imagine will attract a degree of extension risk premium. The big question is whether it eventually has some company in there – not an obvious ambition for any bank.