(Adds background details and quote)
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
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