Santander tackles TLAC deficit with senior non-preferred surrogate

* Santander to jump starting gun on Spanish senior non-preferred issuance

* Spanish lender to introduce contractual clause to bypass legislative delay

LONDON, Jan 11 (IFR) - Santander is considering ways to issue a new type of senior bond well in advance of the requisite legislation being passed, allowing it to chip away at an approximate 30bn issuance target over the next two years.

The Spanish bank said on Wednesday that it will issue 16bn-20bn in 2017 and another 12bn-15.5bn in 2018 of so-called senior non-preferred, set to become a major new asset class as European banks respond to regulatory demands to beef up their loss absorbing buffers.

Though the European Commission endorsed the senior non-preferred format late last year, the legislation permitting this type of issuance is only in place in France and is not expected to be passed elsewhere in Europe before the second half of 2017 at the earliest.

But global systemically important banks (GSIBs) like Santander - which must meet a global standard known as total loss-absorbing capacity (TLAC) - cannot necessarily afford to wait that long, and the lender may use contractual provisions to save time.

“Senior notes would include a contractual status clause which would contemplate a senior second ranking (‘senior non-preferred’) in resolution and insolvency,” the issuer wrote in a presentation.

The senior second ranking status would automatically be aligned with the Spanish law transposing the Insolvency Harmonisation Directive.

It would not be the first time that a European bank has tried to preempt changes in the regulatory arena. ING last year sold a Tier 2 bond with an optional redemption allowing it to flip from the opco to the holdco in anticipation of amendments to the Dutch resolution framework.

“I think that what Santander is doing is a variation of the flipper,” said one FIG DCM banker.

“Although the European Commission talks about implementation by mid-2017, I think there are some countries where that may be a stretch for the domestic legislative timetable, so this structure would allow banks to crack on earlier where they want to.”


2017 is already poised to be the year of senior non-preferred issuance, but Santander’s proposal indicates that this new market could take off more quickly than expected.

UniCredit said in December that it plans to issue senior non-preferred debt in the coming years, but that issuance would be “more back-ended” given concerns around potential legislative delays, for example.

A strong start by the French banks should help quash any nerves about investor demand, but bankers warn that the buyside could force Santander to pay up.

“I think the contractual option does work, but it will probably come at a cost,” said another banker.

“The size [they have to do] is another cost - it’s a massive number. But Santander hasn’t really used the dollar market much in the past, so that’s a good pocket of demand they haven’t really used.”

Santander plans to issue 12bn-14bn of 2017’s target out of the main issuing entity, with another 2bn-3bn apiece from Santander UK and Santander Holdings USA.

Bankers are already pitching similar trades to other lenders though GSIBs, which have more pressing needs, are the prime candidates for issuance.

“I think that non-GSIB issuers are more likely to bide their time and wait for legislation to be approved, which at worst probably takes a year to implement,” said a bank analyst. (Reporting by Alice Gledhill, editing by Helene Durand, Ian Edmondson)