By Danielle Robinson
NEW YORK, Oct 31 (IFR) - Santander UK was swamped by more than USD9bn of orders on Thursday, allowing it to launch a USD1.5bn 5.0% 10-year Tier 2 Yankee bond a staggering 15bp tighter than other recent European subordinated offerings.
Lead managers Barclays, Bank of America Merrill Lynch, Deutsche Bank, Morgan Stanley and Santander announced the deal for the former Abbey National at initial price thoughts of 287.5bp area over Treasuries.
They were instantly flooded with USD10bn of orders for the Baa2/BBB/A- rated issue, enabling leads to pull in guidance to 260bp.
About USD1bn of orders then dropped out as Santander UK pushed pricing to 250bp, a level that is 50bp inside where ING (Baa2/BBB+/A-) priced a 2023 Tier 2 on September 16 and 15bp tighter than where ING’s subordinated debt traded today, at 265bp-258bp over Treasuries.
Santander UK is the latest European bank to go to the dollar market in the past month and takes advantage of a surge of interest in European banks in the US, especially for Tier 2 subordinated offerings.
As well as good investor demand, some borrowers have been able to achieve much better pricing in the Yankee sub-debt sector than in euros.
“Unlike a CaixaBank that doesn’t travel so well and would have to pay considerably more to do dollars, Santander is a name that works well in the US,” said one banker.
US investors who have profited from an extraordinary amount of spread tightening in US banks in the last year are now turning their sights on European banks and especially their subordinated debt, as the next place to enjoy huge out-performance.
“The spread on these banks will tighten as they undergo more stress testing and continue to beef up their capital,” said one investor.
An added twist to the Santander UK deal was that the Spanish parent took 45% of the allocation for itself.
Investors said Santander UK executives gave vague answers to questions on why Santander the parent was taking up such a large chunk of bonds.
“The thing is, people representing the Spanish parent were not available on the call,” said one investor. “It was just the Santander UK people, who said they couldn’t speak for Santander Spain as to why it was taking up that 45%.”
The general view, however, was that Santander Spain had excess liquidity that it had decided to put to work by taking up some of the bonds that would offer a juicy coupon.
“I guess it’s one way to get a ‘dividend’ payment of sorts from one of its subsidiaries,” said one market participant.
The move, however, has muddied Santander Spain’s persistent marketing pitch in recent years that its subsidiaries, like Santander Brasil, Chile and Mexico, Santander USA and now Santander UK, are all autonomous entities who raise funds for their own needs, and not for the needs of the parent.
“I always had my suspicions about their standard mantra of management that its geographical regions are independent from a funding and capital perspective,” said one investor. “I think the transaction today confirms the reality that this is a big group and they work to maximise the overall profitability and capital management of the group.”
Although it didn’t appear that Santander Spain had any other motive than to put some liquidity to work in a high yielding deal, its presence nonetheless demonstrated a link between the parent and one of its autonomous entities when capital securities are being issued.
Any suspicions regarding the autonomy of Santander UK, however, were drowned out by the sheer demand for the deal.
At 250bp, Santander UK priced 37bp inside the trading levels of BPCE (Baa3/BBB+/A-) 5.7% 2023s at 287/280bp. RBS (Ba2/BB+/BBB-) 6.1% 2023 subordinated Yankee is trading at 320bp/310bp today.