Santander in selling mood as bond buyback fails to make impact on balance sheet

This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

--------------------------------------------------------------------------------------------------------

Santander remains in selling mode after the weak investor response to its bond buyback programme, a person familiar with the bank told Dealreporter. The listing of its Brazilian unit is the next item on the agenda, with pre-marketing to commence in the coming days, he said.

Santander’s tender offer to buy back a swathe of securitised bonds at face value, announced at the end of August, had a potential value of EUR 16.5bn. But when the offer closed on 9 September, only around EUR 610m of the bonds had tendered. A source familiar with the situation said that in fact a significant chunk of the bonds were held by bank treasuries and central banks, which under accountancy regulations find it hard to sell bonds.

As previously reported, the buyback programme was an aggressive attempt by the Spanish bank to boost its capital ratios during a self-imposed break from acquisitions. The normally acquisitive bank has in the past sought to strengthen its balance sheet as much as possible before returning to M&A activity.

Had more bondholders tendered, Santander would have created capital gains that could have gone straight into the bank’s general provisions without being taxed and with no impact on P&L, a credit analyst following the situation noted.

The analyst said the market is asking whether Santander would come back for another buyback round. “They’ve done a substantial amount of cleaning up already but have a multitude of bond issues through different entities. As long as they could book a profit, it would be attractive.”

One option, if Santander is committed to cleaning up its asset-back securities (ABS), is for another move on the securitised bonds, the analyst said. Another could see the bank look towards its sterling-denominated Lower Tier II hybrids, some of which the analyst noted were trading in the 70s - meaning a profit could be booked by buying them back.

The source familiar with the situation would not comment on whether Santander would come back but said on the whole the “window of opportunity for doing a decent tender offer” is gradually closing. “On the senior side, the market is rallying hard so anyone doing one needs to offer more aggressive terms than before.”

The person familiar with Santander’s thinking also declined to comment on the scope for more restructuring. However, the bank is clearly still focused on selling, the person said, with its attention now turning to the initial public offer (IPO) of new shares in its Brazilian unit, with pre-marketing about to begin.

Like the bond initiative, the IPO (valued around USD 3bn) has been designed to provide a boost to the bank’s balance sheet, which the buyback’s low take-up was said to have had a minimal impact on. The person familiar with Santander’s thinking noted that the end result of the buyback would be ”insignificant” in terms of the bank’s capital ratios.

One source who follows the Spanish banking sector said that Santander remains one of the best capitalised banks in the world. The bank last year raised its minimum core Tier I capital target to 7% from 6% and reached the new minimum level through a rights issue worth EUR 7.2bn. The bank had a core Tier I ratio of 7.5% at the end of the first half, 50bps above the minimum level.

The bank’s executives have indicated in the past that Santander can strengthen its ratios by 40-50bps a year on the ordinary gain on free capital while it refrains from further acquisitions. Santander has also been aggressively disposing non-core assets, which further improves capital ratios.

Although attempts by Santander to improve its capital ratios are often interpreted as a prelude to its next buying spree, the first person said that further dealmaking remains off the agenda for the time being.

The credit analyst said it was not surprising so few bondholders had tendered given there was no premium offered, a view shared by a financials traders who said the offer had been pitched far too low. The source familiar with the situation said not all of the bonds concerned are actively traded but that, on the whole, those that do trade were priced close to or a little higher than the tender level on 9 September.

The trader added that there seems to be fewer panic sellers around at the moment. Those out there had opted to tender into the offer, the analyst noted. “What they’ve effectively done is to remove any distressed sellers. One result of this is that it looks like the holdings are correctly priced and shows the ABS market is stronger than it was.”

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@dealreporter.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714