Banco Santander came to the market with a new AT1 CoCo in EUR – which came at a very attractive coupon of 4.375% or spread of around 450bps – and very cheap compared to existing bonds. The bond is callable in January 2026 (non-call 6) after which the coupon refixes to the 5-year swap rate plus 453.4bps. As a comparison, Santander’s senior non-preferred bonds (which can be bailed-in) maturing in 2025 offer a yield of 0.4% or spread of 55bps. We are thus able to capture more than 10x the yield for the same fundamental risk, on a very high quality issuer, A-rated by S&P.

 

Banco Santander issued this new deal to refinance the 5.481 that has been callable quarterly since the first call date was skipped in February 2019.  (remember that!). This highlights the limited extension risk to perpetuity for the market, as (1) the “non-called” 5.481% AT1 CoCo performed very well post-non-call of 7% given  the very high income  yield plus  some price recovery to 100(2) the bond was taken out “only” a year after the non-call.

 

We  participated in the new deal in order to roll over our position in the 5.481s that will be redeemed in March. Although the book was more the 6x oversubscribed, we were allocated EUR43MM or close to half of our demand – reflecting our strong relationship with our issuers, as important providers of capital and funding in subordinated debt markets.

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