Santander tests investor interest for inaugural AT1 bond

Wed Mar 5, 2014 2:54am EST

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LONDON, March 5 (IFR) - Banco Santander, the eurozone's largest bank by market share, is testing interest on its debut Additional Tier 1 bond at mid to high 6% as it seeks to replicate a structure used by other Spanish banks as they storm ahead in the race for capital.

The perpetual non-call five-year note is expected to price later on Wednesday. The bank is rated Baa1/BBB/BBB+ by Moody's/S&P/Fitch, with the notes expected to be Ba2 by Moody's.

The lead managers are Bank of America Merrill Lynch, Citigroup, Santander and UBS.

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 is using 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.

That bond is deemed to be the most relevant market for pricing and was bid to yield at 6.5% according to multiple sources who believe that the Santander's more diversified business model means it might be able to price through its country peer.

That isn't the case in the senior and covered bond market where both issuer's debt trades flat to each other.

For its part, Santander wrapped up a two-day roadshow on Tuesday where it built a "staggering" shadow order book according to one capital expert.

"Investors have been very constructive on Santander and seeing as the market is so strong and Spain is in vogue I think this will go very well," said the banker. (Reporting By Aimee Donnellan, editing by Julian Baker)

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