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MADRID, Feb 12 (Reuters) - Banco Santander on Tuesday opted not to call a 1.5 billion euro ($1.7 billion) additional tier one (AT1) bond once the deadline expired, becoming the first European lender not to redeem this kind of hybrid debt that can be converted into equity.
“When making call judgments we have an obligation to assess the economics and balance the interests of all investors. We will continue to monitor the market closely and will seek to exercise call options where we believe it is right to do so,” Santander said in a statement.
Santander’s contingent convertible (CoCo) was eligible to be called on Tuesday and recent confusion over whether the Spanish lender would redeem the bond had caused wild swings in the bond’s price.
Bankers warned that the Santander non-call may incentivise other issuers with low reset credit spreads to follow the Santander route, meaning investors may not be paid back.
After the markets closed on Tuesday Santander’s 6.25 percent perpetual Additional Tier 1 bond was down 1.6 cents to 96.8 cents according to Tradeweb Data.
Some institutional investors said they were not worried about a potential knock-on effect on other European lenders.
“In fact it is a good sign of the market maturing that we get instances of bonds extending as this is the point of the structure and it should be focused on economic rationale, not reputational risk,” said Steve Hussey, head of financial institutions credit research, at Alliance Bernstein in London.
Bankers also warned that the non-call puts a spotlight on how these AT1s are structured going forward.
“Do institutional investors prefer a more discrete call structure, where the AT1 bonds is then not callable for another five years, or the Santander format which has quarterly calls?” said Kapil Damani, head of capital products at BNP Paribas.
If there is uncertainty over when such bonds will be called this could make it more expensive for banks to issue them as investors will demand a higher premium for bearing the risk.
However, while Santander’s own $1.2 billion capital bond - issued on Feb. 6 - fell in price, other bonds of the same structure from other European banks had not reacted to the news.
CoCo bonds were introduced in the wake of the 2008 financial crisis to ensure that bond investors as well as shareholders bear losses if a bank runs into difficulty before any taxpayer cash is needed.
Often called “hybrid”, they convert into equity if a bank’s capital level falls below a certain threshold.
Globally, about $13.5 billion equivalent worth of CoCos are redeemable this year, around $8.4 billion of which are from European banks, according to Reuters calculations based on Refinitiv Eikon data.
Funding costs are rising right across the banking sector, partly as a result of central bank actions to wind down stimulus programmes. As a result, it could become more tempting for banks not to call their bonds.
$1 = 0.8857 euros Reporting by Jesús Aguado, Virginia Furness, Sujata P. Rao-Coverley; additional reporting by Andrés González; Editing by Ingrid Melander and David Evans