Santander decides against AT1 early redemption

13 February 2019

Decision goes against market expectations, but makes economic sense

Reports abound in the media this morning of the “shock” felt in the market following Santander’s decision not to call a EUR 1.5bn Tier 1 capital bond at the first early repayment date. Despite the call redemption being at the issuer’s option, it is common for this option to be exercised in the bank debt market, leading to an expectation among some investors that the bonds would be called. A new Tier 1 capital bond raising last week further fuelled speculation that the old bonds would be redeemed.

Putting aside any potential reputational damage, we think the decision against early repayment probably makes economic sense for the issuer. From the 12th March the coupon rate on the bonds will fall from the current 6.25% to a new rate fixed for the next 5 years, expected to be around 5.5% (5.41% over the 5-year swap rate prevailing at that time.) Santander also retains an option to call the bonds on any future quarterly coupon payment date, should it wish; failing that, the bonds are perpetual, meaning they need never be repaid.

The Spanish bank launched a new US$ 1.2bn Tier 1 capital bond last week, for which they achieved what some considered tight pricing with a coupon of 7.5%;

In our opinion, this only serves to highlight the importance of understanding the terms and individual nuances of each particular instrument, in addition to using a sophisticated analytic model to price these instruments and assess the risks involved, such as extension risk.

Monis provides analytic solutions and detailed terms and conditions data covering the entire liquid AT1 Contingent Bond market. Please contact Monis sales if you would like to discuss your requirements.

Philip Kramer, CFA
+44 20 8081 3775
Tatyana Hube, CFA
+1 646 445 8334
Will Weichhart
+44 20 8081 2078
Monis Data
+44 20 8081 2700

Copyright © 2019 by Fidelity National Information Services, Inc. and/or its subsidiaries ("FIS"). This document is copyrighted with all rights reserved. No part of this document may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any language in any form by any means without the prior written permission of FIS. Except as set out in the contract your company has with FIS, in no event shall FIS be liable for damages of any kind arising out of the use of this document.