LONDON, Aug 23 (IFR) - Spanish banking giant Banco Santander sent ripples through the bond market on Thursday after it announced it would buy back some of its subordinated and hybrid debt through an unmodified Dutch auction, just a day after it priced the first senior unsecured issue from a Spanish bank in six months.
Though not unusual in the asset-backed market, where securities can be difficult to locate and bid/offer prices can be very wide, unmodified Dutch auctions, which involve bondholders telling the bank what they own and where they want to sell the bonds back rather than the bank setting a minimum buy-back price, have never been used for a bank capital tender.
Santander is no stranger to controversy when it comes to liability management. An offer to exchange some subordinated debt into new senior notes in November last year caused fury among investors as they faced an unpalatable choice of either crystallising mark-to-market losses if they took part or being stuck with illiquid bonds unlikely to be called on the scheduled call date if they did not. Less than a quarter of the bonds were brought by investors to the tender, creating very little capital for the bank.
Wednesday’s announcement caused upset among investors who criticised Santander for its aggressive methods. “Santander is never far away from trying to annoy bondholders and people have come to expect this kind of behaviour from them,” said a senior analyst at a large fund manager. “Because they’ve not given a price, as an investor, you have to open up your book to Santander and Deutsche Bank of all banks.”
Another questioned what Santander was trying to achieve. “This is a much better deal for the bank than investors in terms of information gathering and Santander has the power to do whatever it wants,” the investor said. “It can spend up to EUR2bn or nothing at all if it doesn’t want to, there is no waterfall so you don’t know who will be prioritised and it’s difficult to quantify how much capital this is actually going to create.”
Analysts were equally scathing on the method, saying it gave Santander all the power and optionality. “There is no obligation for Santander to spend even one cent of the EUR2bn, you really are opening your kimono and just hoping it’s not a transvestite in your bathroom,” Tom Jenkins, an analyst at Jefferies wrote in a note to clients today.
A senior liability management banker said that if the aim of the trade was to create capital for the bank, then it was not the right approach because investors might be reluctant to participate. “If it’s about being opportunistic and being perceived as the bid, then it’s fine,” he said.
Santander is targeting an outstanding EUR7.5bn equivalent, including five Tier 1, two Upper Tier Two and fourteen Lower Tier 2 denominated in euros and sterling. It will spend a maximum of EUR2bn. On average, the securities had been trading at 79% pf par, some of which had been targeted in previous liability management.
Deutsche Bank, which is handling the trade alongside Santander however defended the offer.
“As part of active balance sheet management, Santander is providing investors with a liquidity event on a pool of subordinated securities and it’s for investors to decide whether they want to participate or not, and at what price, it’s an entirely voluntary exercise,” said Duane Hebert, head of EMEA liability management at Deutsche Bank.
He added that market conditions are also a driver behind the method chosen by the issuer. “Spanish hybrids have been very volatile and it is quite challenging to put out a fixed tender price with a premium given that a lot of movement can occur over the execution period of 6 business days,” he said. “Putting out a firm level can be risky and this structure protects the issuer as well as investors.”
Following the announcement, the targeted bonds were quoted one to two points higher in the secondary market.
The bank said in its announcement that the purpose of the buy-back was to effectively manage the group’s outstanding liabilities and to strengthen its balance sheet as well as provide liquidity to the security holders.
And not everyone was critical. “This is certainly a better format than the November 2011 exchange,” Bank of America Merrill Lynch analysts wrote. They added that given Santander’s disciplined past track record, they thought the bank was unlikely to accept any offer above fair value.
The other point of contention was whether a very expensive EUR2bn two-year senior unsecured trade priced by Santander on Tuesday had been issued to finance the liability management. The deal came at 390bp over mid-swaps, and some questioned why the borrower would want to raise funding at such elevated levels.
“It seems like quite a bit of a coincidence,” one investor said. “Who knows whether that’s why but the timing and size to me say that’s what it was for.”
Another investor questioned whether the buyers of the senior knew about the liability management and how they would feel. “If you bought the two-year, suddenly you could find yourself with EUR2bn less of subordinated debt underneath you,” he said. “I wouldn’t be massively happy if I’d bought it.” (Reporting by Helene Durand, Editing by Julian Baker)