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Santander's dramatic withdrawal of an offer to hire Andrea Orcel to the post of general manager may have made headlines in recent weeks, but the Spanish lender's decision not to honor a "gentleman's agreement" in the retail market. bank bonds could have more significant consequences.
Santander announced Tuesday that it opposed the early repayment of a € 1.5 billion capital bond, which made it possible to meet the expectations many badysts who had said a week ago that such an outcome was almost certain.
But while Orcel is preparing to take legal action against Santander following the cancellation of the bank's offer, the injured bondholders who have seen the value of their debt drop sharply have no recourse to this type: the bank has absolutely no obligation to repay at this time.
While fury may be a source of confusion among outside observers, it marked a turning point in the $ 200 billion "Tier 1" or "cocoon" market, the type of debt riskier bank that can be written off in times of stress.
The European market has long been based on the understanding that banks will repay their bonds at the earliest opportunity. A rare decision by Deutsche Bank not to call such an obligation ten years ago rocked the market at the height of the financial crisis.
However, the European regulators do not want the banks to respect the agreement of this gentleman if it weighed down the interest bill of the bank. Indeed, policymakers have designed coco bonds after the financial crisis to strengthen banks' balance sheets, making them more resilient, not less.
A senior banker in the debt market said that the Treasury departments of several other banks were wondering whether Santander would call the bond or not, reflecting the scale of the debate that took place in the days leading up to the decision.
This uncertainty did not even exist a fortnight ago. Then, few people in the market have suggested that such a call was even a possibility. The Santander management reiterated in a call at the end of January that investors would only pay back if it made economic sense.
But Santander finally signed last Wednesday an unusual agreement, which has led many investors to change their forecasts. The Spanish bank has launched a new sale of AT1 bonds of $ 1.2 billion, which seemed intended to finance the imminent repayment of the existing bond.
The impression that a refund was imminent was reinforced by the unusual timing and structure of the transaction. Santander issued the bond during the Chinese New Year holidays, which means that major buyers such as private Asian banks would be inactive. For some, this suggested that the bank was in a hurry to finance the call.
Precipitation proved costly for the banks managing the sale, as they were not able to fully sell the $ 1.2 billion contract to investors. So they had to take some of the bonds in their own balance sheet. Someone familiar with the subject, however, stated that the subscribers had only a "very small amount".
The bond also had an unusually short settlement date of two days, which means that Santander would have the money in his hands last Friday – what investors saw as the bank's time to call the coconut. Indeed, a notice had to be filed 30 days before March 12, Sunday.
But the bank then told investors that they had until Tuesday, February 12 to make a decision. Indeed, the bank received a legal opinion that 30 days should be interpreted as a month, regardless of the fact that there are 28 days in February.
For some on the market, it was the first sign that something was wrong. Others have become more adamant about the possibility of a refund, saying the bank was looking for a little more time to take the final steps.
Santander's decision not to call has left former optimists asking themselves a key question: why did the bank lift the new bond in the first place?
JPMorgan's credit badysts said after the decision that the new $ 1.2 billion bond was still most likely issued to replace the existing € 1.5 billion bond. Analysts have described the decision not to follow as a "technical problem" surrounding regulatory approvals. Analysts argue that the bond should now be called in three months for this reason.
Vicki Cockbain, director at Aberdeen Standard Investments, said she was "optimistic" about the incident, knowing that Santander may reverse his decision in three months.
"The concern would be whether other banks would begin to review appeal decisions in a different way," she said. "But I would be surprised if this happened simply because Santander dealt with his call as he always said – on an economic basis."
Santander's decision was made throughout the coconut market, with the average price of these bonds closing higher on Tuesday, despite a sharp drop in the Santander bond.
"The market is changing dramatically when everyone expects there to be 'white' and then 'black', this was not the case here," says Jerome Legras, head of research at Axiom Alternative Investments.
"People can be pissed off just like they are when their football team loses, but everyone knew it was a" well-balanced "event and it just fell on one side of the coin," says -he.
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