UPDATE 1-Santander fortifies balance sheet with new hybrid bond

Thu May 8, 2014 3:50am EDT

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By Aimee Donnellan

LONDON, May 8 (IFR) - Spain's largest bank Santander has opened books on an inaugural US dollar convertible Additional Tier 1 bond, reawakening a market that has been dormant since the end of March.

The Spanish lender is seeking to sell a perpetual non-call five-year offering for a maximum size of US$2.5bn and has announced initial price thoughts in the 6.625% yield area via lead managers Credit Agricole, Deutsche Bank, Goldman Sachs, Morgan Stanley and Santander.

According to market experts, selling conditions are ideal for such a transaction due to a dearth of supply in recent weeks and the fact that the cost of insuring subordinated debt has fallen to a four-year low. The iTraxx Subordinated index is at 116bp on Thursday, according to Tradeweb.

Investors also can benefit from a number of relevant pricing points provided by Santander's Spanish rival BBVA.

"Santander is quite easy to price because there is a BBVA dollar bond out there against which it can benchmark," said Robert Montague, a senior investment analyst at ECM Asset Management.

A banker on the trade said while he expected demand to be strong, he did not anticipate the order book to reach the same size as Santander's inaugural euro Additional Tier 1.

"We won't see over 15bn of demand," the banker said. "The appetite for the product is intact but investors are a lot more orderly and are not inflating orders as much as before. We will have a more reasonable book that will be more reflective of the real demand for the trade."

He added that while Santander had the authorisation to do a US$2.5bn issue, it would not raise that full amount.

Spain was one of the first countries in Europe to offer enough clarity for banks to issue Additional Tier 1 bonds last year and banks have used the instruments to bolster their balance sheets and improve their leverage ratio.

Santander's phase-in Common Equity Tier 1 ratio was 10.6% at the end of March.

Investors who buy Santander's issue could see their bonds converted into equity if the bank's or group's Common Equity Tier 1 ratio falls below 5.125%.

BBVA's US$1.5bn perpetual non-call 2018 bond sold in May last year at a 9% yield was quoted at 5.89% on Thursday morning, while Santander's 1.5bn perpetual non-call five-year launched in early March with a 6.25% yield was quoted at 6%.

Santander's Additional Tier 1 note is rated Ba2 by Moody's and is set to price later today. (Reporting by Aimee Donnellan,; Editing by Helene Durand, Sudip Roy)

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