February 14, 2019 | Cbonds
|On Tuesday, the Spanish bank Santander announced that it will not execute the call option scheduled for March 12 for perpetual Additional Tier 1 international bonds due to "obligation to assess the economics and balance the interests of all investors."|
The unexpected rejection to execute the call option sent tremors through the market – as a rule, banks redeem AT1 bonds on the date of the first call option thereby demonstrating the availability of liquidity to investors. At the same time new issues of CoCo bonds are being placed, which refinance previous issues. Last week, Santander Bank placed AT1 bonds worth 1.2 billion USD; in doing so, the bank convinced investors of its intention to repay CoCo bonds in euros. However, at the time of the deadline, the bank announced its decision to skip the option.
In 2008, Deutsche Bank skipped the date of the call option; in 2016, Standard Chartered Plc и Commerzbank did the same. Subsequently, similar events did not occur in the market.
According to analysts, the decision of Santander will force investors to reevaluate all the CoCo bonds circulating in the market, as the rest of the banks may follow the example and break with tradition of repaying securities on the date of the first call option. As a result, the cost of this type of funding will increase for banks.
However, skipping the option may cost less for Santander than the redemption of bonds and the issue of new CoCos – a floating rate of 5Y EUR Swap Rate + 5.41% for this issue makes it possible to count on a lower borrowing price than the rate of the new placement under the current market conditions.
A CoCo bond (Contingent Convertible) is a debt obligation, which is converted into equity subject to the issuer's financial difficulties. The issuer has the right not to pay a coupon or not to execute an option, while offering a higher interest rate. CoCos are a reliable and cheap refinancing mechanism during the threat of bankruptcy, since the conversion refinances the issuer's obligations without incurring the cost of issuing any new shares.
|Status||Country of risk||Amount||Issue ratings (M/S&P/F)|
Company: Banco Santander
|Full company name||Banco Santander S.A.|
|Country of risk||Spain|
|Country of registration||Spain|