UPDATE 1-Santander prepares ground for low-trigger CoCo

Wed Feb 26, 2014 9:59am EST

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By Aimee Donnellan

LONDON, Feb 26 (IFR) - Banco Santander, the eurozone's largest bank by market share, is preparing to sell its first contingent convertible bond in an exercise that will see it see it replicate a structure used by other Spanish banks as they storm ahead in the race for capital.

Spain is one of the few countries in Europe where there is enough clarity on tax treatment for banks to issue AT1 bonds. BBVA and Banco Popular Espanol have made the most of this, raising capital to fortify their balance sheets and improve their leverage ratios.

Santander is keeping it simple and will replicate the tried and tested perpetual non-call five-year equity convertible structure used by both of the aforementioned banks. Like the others, the bond will trigger if the bank's Common Equity Tier 1 (CET1) ratio falls below 5.125% at the bank or group level.

As of the end of 2013, Santander's CET1 ratio stood at 10.45% at the group level and 12.26% at the bank level.

By opting for the euro market, Santander will benefit from a deepening pool of investor demand for this type of product, which most recently saw country peer BBVA attract EUR14bn of orders from over 600 investors for a EUR1.5bn issue that priced with a 7% coupon. European accounts were dominant in the transaction that priced earlier this month, taking 81% of the paper, up from three-quarters of last year's US dollar AT1 deal.

Last April, BBVA became the first European bank to sell an AT1 bond. That USD1.5bn perpetual non-call five-year deal was priced with a 9% coupon and complied with CRD IV.

Outside of Spain, both Credit Agricole and Barclays have raised AT1 capital in both euros and US dollars, and analysts estimate that Europe's lenders will raise EUR20bn-EUR45bn in AT1 and Tier 2 debt this year.

"A lot of people have been expecting this transaction from Santander and I think, given the market conditions, it will attract a lot of demand," said a hybrid bond expert.

"Other banks are looking to issue similar deals in the coming weeks, so I think Santander was keen to get in ahead of that wave."

Since October, the cost of insuring subordinated debt against default has dropped by 81bp, to 131bp, according to Markit's Subordinated Financials Index on Tradeweb, and investors are keen to buy more paper.

Santander has hired America Merrill Lynch, Citigroup, Santander itself and UBS as joint bookrunners for the bond, which is expected to be rated Ba3 by Moody's and which will be launched after a European investor roadshow commencing March 3, subject to market conditions. (Reporting by Aimee Donnellan; Editing by Philip Wright and Sudip Roy)

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