Santander Gives Investors the Runaround

(Bloomberg Opinion) -- Banco Santander SA missed an opportunity to win over its bondholders on its earnings call this week.

Investors are worried that the giant Spanish lender may take the highly unusual (and unwelcome) step of not redeeming 1.5 billion euros ($1.7 billion) of perpetual bonds in March. Rather than offering any public reassurances, the bank’s CEO Jose Antonio Alvarez merely stuck with the line that “we call or we don’t call based purely on economic terms.”

He’ll probably have to do the right thing in the end. But this is a pretty high-handed way of communicating with your bondholders – the European ones, at least – who buy this type of paper in the expectation that the issuer will redeem it at full face value. Alvarez would be within his rights to upend convention, but it would be extremely poor form to do so.

The instruments in question are known as Additional Tier 1 securities (or CoCos for short), which offer a high coupon in exchange for higher risks: They can be written down and converted into shares if a bank’s capital ratio falls below a certain level. The reason why the Spanish lender might not redeem the 1.5 billion-euro perpetual 6.25 percent AT1 in March, as investors expect, is that it would probably be cheaper to just extend it rather than issuing new bonds.

Santander Gives Investors the Runaround

According to Santander’s updated issuance plans for 2019, another 1.5 billion euros of hybrid AT1 bonds will be raised this year. That should indicate that the previous 6.25 percent perpetual will be called. But Santander also has a May call date coming up for a different $1.5 billion 6.375 percent perpetual bond. There’s a strong chance that one of these two existing AT1 issues won’t be redeemed. Alvarez certainly isn’t offering any public assurances, although it would probably be easier for him to not call that second, dollar-denominated bond. American investors tend to have a stronger stomach for being treated this way.

If he did decide not to call the euro note, it would send a shiver through the bank capital market. It would be reminiscent of a similar incident in December 2008, when Deutsche Bank AG decided not to call a 1 billion-euro subordinated bond. Even though this happened at the height of the financial crisis, it damaged Deutsche’s reputation as an honor-worthy borrower, something it has suffered from ever since.

In a relatively benign economic climate, Santander wouldn’t even have the crisis excuse. There’s no risk to its capital ratio or ability to raise bail-in money if needed. Skipping the call would show it values short-term gain over long-term trust and unhindered access for its funding. The Spanish bank often has a tricky relationship with investors as it is, because of its razor-sharp focus on keeping funding costs to a minimum. And, as my Bloomberg News colleagues argue, there’s only a marginal benefit for Santander to keep the existing 6.25 percent bond.

Of course, it has a responsibility to its shareholders, but after the debacle around its failed hiring of Andrea Orcel as CEO it’s in need of some good press. Santander should set the right example.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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