Santander Skips AT1 Call Option in Costly Refinancing Market

Banco Santander SA opted not to redeem a €1 billion ($1.1 billion) additional tier 1 bond, an unusual move even amid the turbulent market for bank debt this year.

(Bloomberg) — Banco Santander SA opted not to redeem a €1 billion ($1.1 billion) additional tier 1 bond, an unusual move even amid the turbulent market for bank debt this year.

The redemption had been hanging in the balance over the past few weeks as the first date to call the bond approached on Sept. 29. Santander’s bond has been trading more than one cent on the euro below face value, indicating traders didn’t see a call as a certainty.

Analysts saw Santander as unlikely to call the bond without issuing a new one, because to do so would exacerbate its shortfall of additional tier 1 capital and make its capital structure more expensive than it should be. And a new bond would be costly, given the premiums investors are demanding.

“The market is open for sure but I guess they thought they would need to pay more,” Suvi Platerink Kosonen, a bank credit analyst at ING Bank NV, said of Santander. “I would assume they are waiting for a better timing for issuing a new AT1.”

Additional tier 1 bonds are perpetual, but investors typically expect banks to exercise call options to repay them at the earliest opportunity when the cost of doing so isn’t punitive. While the market has become more used to skipped calls in recent years, the large majority of issuers redeem those bonds at their first call date.

This year has been a challenging one for investors in the securities, which are the riskiest type of bank debt. The bonds have been recovering steadily in recent months but have yet to recoup all losses since the failure of Silicon Valley Bank and the historic $17 billion wipeout in March of AT1s issued by Credit Suisse Group AG. 

Yields on the bonds are more than 10% and well above the historical average, based on Bloomberg indexes. The yield premium on AT1s over benchmark bonds remains wide enough to deter some of the most economically minded banks from replacing old notes.

Santander’s announcement was the first skipped call since Deutsche Pfandbriefbank AG’s in March.

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A company spokesperson said Santander is committed to executing calls when it makes economic sense. The note is callable every three months.

Also Thursday, Switzerland’s Zürcher Kantonal­bank said it’s not calling a 750 million Swiss franc ($853 million) AT1 bond, saying it “takes every call decision individually on an economic basis, taking account of underlying market conditions” among other factors.

The Santander bond is broadly unchanged on Thursday. Meanwhile, prices on ZKB’s issue are tumbling, indicating that traders had not expected that decision.

Read more: Call Them AT1s or CoCos, Here’s Why They Can Blow Up: QuickTake

Santander’s AT1 pays a fixed rate of 5.25% that will switch to just under 500 basis points above the five-year swap rate. The closest comparison for a new issue, a €1 billion AT1 sold by domestic rival Banco Bilbao Vizcaya Argentaria SA in June, is indicated at a spread of 562 basis points, based on data compiled by Bloomberg.

With the exception of Santander and PBB, lenders have been exercising options to repay those AT1s early this year, even in the difficult post-Credit Suisse market. 

Skipped Calls

In some cases, they have been able to rely on beefy capital levels to repay without replacing. Meanwhile, Santander’s smaller Spanish peer, Abanca Corporacion Bancaria SA, sold new AT1s in July while buying back a previous issue, in an operation that was characterized as bondholder-friendly.

Despite being a rarity, skipped calls on AT1s are not unthinkable. Santander became a high-profile early case back in 2019 and a handful of other issuers followed suit during the early pandemic turmoil and in 2022, when surging interest costs made normal refinancing operations too expensive.

“This is the Santander blueprint,” said Filippo Maria Alloatti, head of financials at Federated Hermes. “If spreads go tighter from here, they may come back to the market this side of Christmas.”

(Updates to add bond price moves in ninth paragraph)

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