REFILE-Banco Santander Totta surprises with ABS exchange

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By Anil Mayre

LONDON, Sept 28 (IFR) - Banco Santander Totta launched an unusual offer this week to exchange three Portuguese Hipototta RMBS tranches it had previously failed to buy back in full for a retained covered bond due January 2014.

Below-par liability management exercises can be an effective way to boost capital ratios, but the desire to switch the notes to securities held by the originator is a new tactic. And it could be replicated in the peripheral market, where large amounts of bonds are likely to have been retained by originators when public market access was restricted.

The three bonds have about EUR1.2bn outstanding, so tendering for them would require a decent sum of cash. But the proposed exchange - if it were successful - would enable the originator to complete the offer without paying more cash, said one source involved in the process.

Investors can benefit from reduced exposure to Portuguese RMBS and shortened duration risk. Slow prepayment rates, of just 1.51% in July 2012 compared with 2.65% a year earlier, according to Moody's, have pushed out the average life of Portuguese RMBS. The source estimated that average lives of some of the notes in question were up to nine years - they could be slashed to just 15 months in the exchange.

JP Morgan analysts said in a research note that the improved terms for repo collateral at the ECB could persuade investors to tender (Hipocat 4A and 5A2 haircuts are 16% and 26%, respectively, versus 1.5% for a covered bond), adding that accounting treatment was likely to be the decisive factor for decision-making.

Those classifying the bonds as held to maturity would be unable or unlikely to tender, while those marking them as available for sale could take advantage of the offer, the analysts suggested.

Another research analyst questioned whether certain investors would actually be able to participate. He said that at least one bad bank with which he was in contact was permitted to sell bonds, but prohibited from taking on additional debt.

UNCLEAR PREMIUM

The originator is offering a minimum exchange price of 85% for Hipototta 1A, 78% for Hipototta 4A and at least 75% for Hipototta 5A2. But the bonds' premium is difficult to gauge, given their illiquidity. One dealer estimated a five to seven-point pick-up, while another said the last trades he had noted were in March, quoting 67.5/68.5 for Series 5A2. Three other traders saw no prices.

These bonds were the subject of a tender offer in March, where the bank reclaimed EUR309m, paying 80%, 73.5% and 70% compared with minimum levels of 78%, 68% and 65%. European ABS has rallied since then, and so a few points have been added to the minimum price.

One difference between the March offer and this one is the format. The previous offer was a modified Dutch auction, where an average price is paid for the bonds successfully tendered. But Totta has now opted for the increasingly popular choice of an unmodified auction - where it assesses each price individually.

The objective is to convert the RMBS into the January 2014 covered bond paying six-month Euribor plus 250bp with a cash price of 98.50. The conversion amount is calculated by dividing the exchange price on the RMBS by the sum of the covered bond price plus accrued interest, and multiplying it by the current outstanding amount of the RMBS tendered.

The originator will cap the offer at EUR600m of covered bonds. The exchange deadline is October 8 2012. Dealer managers are Bank of America Merrill Lynch, Santander GBM and UBS. (Reporting by Anil Mayre)