May 28, 2015 / 1:42 PM / 2 years ago

Santander UK sets eyes on AT1 first, tackles legacy debt

LONDON, May 28 (IFR) - Santander UK has mandated banks for an inaugural Additional Tier 1 bond that could potentially revive a European bank CoCo market that has been dormant since February.

The subsidiary of Spanish banking giant Santander, which is also looking to buy back a handful of outstanding legacy Tier 1 debt issues, will market the sterling transaction until next Tuesday.

Apart from a EUR125m deal for Ireland's Permanent TSB, priced at the end of April, there has not been any Additional Tier 1 euro issuance since the middle of February, while demand for CoCo bonds in the sterling market is untested in 2015 so far.

The transaction will come against a difficult backdrop for CoCo instruments that have been very volatile in recent weeks, with bonds moving up and down by one or two cash points on a daily basis.

A EUR1.5bn perpetual non-call 2021 issue for Santander UK's parent, for example, was yielding at almost 6.8% in early May, though it has recovered and was quoted at 6.48% on Thursday according to Tradeweb. It was as low as 6% in early April.

Meanwhile, investor demand for less risky Tier 2 debt has been tepid at best, with a number of mandated transactions for the likes for Ibercaja Banco, Belfius, Norddeutsche Landesbank and LBBW failing to price.

Santander UK, rated Baa2/BBB/A (Moody's/S&P/Fitch), has mandated Santander GBM and UBS as joint structuring advisers and joint bookrunners and BofA Merrill Lynch, Barclays and Morgan Stanley as joint bookrunners.

Unlike most other UK Additional Tier 1 trades and transactions from parent Santander that convert into equity if the bank's Common Equity Tier 1 ratio falls below 7%, holders of Santander UK's CoCo will be completely wiped out.

It issued £800m of such bonds privately to its parent last year.

This will be another test for the market, as bondholders will have no recovery value in the bank. Santander UK had a 11.9% CET1 ratio at the end of 2014, giving investors a £3.9bn cushion before Santander hits the 7% trigger.

As well as the new AT1, Santander UK is tackling a handful of outstanding legacy debt via a tender offer as it seeks to optimise its regulatory capital structure.

It is offering to buy back three sterling notes: its GBP300m Series A fixed/floating non-cumulative callable preference shares, issued on April 28 2010 in exchange for Alliance & Leicester plc preference shares, of which GBP34.9m are outstanding. The tender price is 106.50.

Secondly, it is seeking to purchase its GBP300m 7.037% step-up callable perpetual reserve capital instruments, issued in February 2001 by Abbey National, at a tender price of 120.00.

Thirdly, it is offering to buy its GBP175m 6.984% fixed/floating Tier 1 preferred income capital securities, issued in August 2002 by Abbey National, at a price of 108.00.

Santander Group holds GBP195.2m and GBP163m of those two bonds, respectively.

The deadline expires at 4pm on June 8 UK time.

The issuer is also offering to buy back its 8.963% non-cumulative trust preferred securities issued by Abbey National Capital Trust I at USD1,350 for every USD1,000.

The offer expires at 5pm, New York City time, on June 8, unless extended or terminated early. Settlement is likely to take place on June 11. (Reporting by Helene Durand, additional reporting by Alice Gledhill, editing by Philip Wright)

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