Issuer and Financial Issuer: Banco Santander
Facing one of the largest funding programmes of any European bank, Banco Santander needed to show more than a touch of creativity to keep on track. For managing a complex global issuance programme across a web of different entities – with a €7.1bn rights issue thrown in for good measure – Santander is IFR’s Issuer and Financial Issuer of the Year.
New regulations following the last financial crisis are forcing lenders to build up buffers of loss-absorbing debt, leaving international banking groups such as Santander having to raise significant sums via relatively untested structures.
France pioneered a new form of debt in late 2016, so-called “senior non-preferred”, allowing its banks to start chipping away at their targets in the most cost-efficient way.
Their Spanish peers, however, were left in limbo waiting for their government to make the necessary changes to insolvency law. That mattered little for smaller players with minimal targets, but Santander had identified a €12bn–€14bn SNP target for 2017 alone, with the overhanging fear that market conditions could deteriorate before it could come to market.
The bank therefore devised an SNP surrogate called “second-ranking senior”, using contractual subordination and a substitution and variation mechanism to ensure the bonds were eligible to meet regulators’ demands while coming at a considerably lower cost than Tier 2.
“This was important because it was the beginning of our TLAC process, but also because at the beginning of the year we didn’t have a law in Spain that supported the issuance of SNP,” said Jose Antonio Soler Ramos, deputy CFO at Santander.
Its inaugural €1.5bn five-year in January attracted more than €4.25bn of demand, the first SNP-type deal from a peripheral issuer, paving the way for a US$2.5bn triple-tranche Yankee in April. The Spanish law was not passed until June, vindicating the bank’s decision to move early.
“They achieved their objective with very strong demand,” said Peter Jurdjevic, a managing director in global finance solutions at Barclays, a structuring adviser on the deal. “There was a big sigh of relief.”
“BEST DEAL IN HISTORY”
Santander also proved to be one of the year’s major stories in the equity market.
It secured near-perfect take-up for its €7.1bn rights issue to finance the acquisition of Banco Popular, the Spanish bank it acquired for a token €1 after a dramatic resolution in June.
Popular’s fate is not without its controversies. Though greeted by many with relief in its immediate aftermath, regulators and Santander itself have since been hit by a wave of legal action as holders of Popular securities contest the decision.
Davide Serra, chief executive of investment firm Algebris, is among that group – but described the acquisition as “the best deal in history” for Santander.
There is no denying the success of the subsequent rights issue. Shareholders subscribed for 1.447bn new shares out of an issue of 1.458bn issued at €4.85 on a 1-for-10 basis, implying a take-up of 99.3%. The unsubscribed 10.806m shares were allocated against oversubscriptions.
Pricing was a 17.8% discount to TERP, the tightest pricing for a European bank rights issue over €1bn since 2012.
Shareholders were able to submit orders beyond their rights entitlement and a total of 10.634bn additional shares were requested, which implies a total subscription of around 8.3 times the amount the bank was seeking to raise.
With Europe’s attention trained firmly on July’s equity raise, the bank looked further afield as it made the next step in its SNP issuance programme.
“We thought that it was important to follow a diversification strategy [and] to look into new investor bases for the asset class,” said Soler Ramos.
The bank sold an A$800m (US$608m) triple-tranche senior bond issue, its inaugural transaction in Australian dollars, and the first SNP issue by any Spanish bank since the appropriate law was passed on June 26 in any currency globally.
Spanish issuers have not been an obvious choice for Australian and Asian investors for much of the post-crisis period, but the deal served as a pathfinder transaction, demonstrating Australian investor demand for Spanish credit and the nascent SNP asset class.
The bonds were priced in line with the levels achievable in US dollars and euros, while also winning new investors and diversifying funding – crucial to avoid overloading any one market, which in turn was supportive for secondary performance.
Santander also ventured into the Swiss market, where May’s SFr400m (US$406m) six-year was the biggest and best SNP of the year in Switzerland. The transaction was key in demonstrating that the Swiss market can offer significant depth for the new product type, putting it on the radar for other potential issuers.
Though SNP was a focal point for Santander in 2017, the bank also returned to the subordinated bond market to maintain its regulatory capital.
Its second euro Additional Tier 1 trade of 2017, a €1bn 5.25% perpetual non-call 2023 that was priced in September, came with the lowest coupon ever achieved in the asset class by a Spanish bank but still managed to rally more than five points in cash terms by late November. That followed a smaller €750m 6.75% perpetual non-call 2022 in April.
“Both AT1 trades were of market size; evidently conditions are different each time we approach the market and they were both successful transactions at their own time,” said Soler Ramos.
The bank also sold the first euro Tier 2 of 2017, a €1bn 10-year bullet, which rallied by more than 130bp between January and the end of November.
The bank did not just issue debt at the group level, however. Santander is structured around subsidiaries that are autonomous in terms of capital and liquidity, and which must comply with loss-absorbing rules in their own right.
As a result, the parent must co-ordinate a complex issuance programme across multiple different issuing entities, in different asset classes and currencies.
Santander UK, for example, raised AT1, senior and covered debt in 2017, also making its RMBS return with Holmes Master Issuer Series 2017-1, its first such deal for more than a year. Santander Consumer Finance, Santander Consumer Bank and Santander Totta also all raised debt in their own right.
COMMUNICATION IS KEY
Intensive investor work was key to Santander’s successes in 2017, particularly since the bank has historically been seen as one of Europe’s more aggressive issuers.
The bank organised roadshows ahead of all its milestone transactions, including two in the US, two in Asia and one in Europe, giving as clear a steer as possible around its issuance plans.
“From the very beginning, we were very clear with US investors that we were planning to approach the US market twice [It returned to the US dollar market in October to raise a further US$2.5bn of SNP]; each time, we did a roadshow to explain our strategy and to update on the credit,” said Soler Ramos.
“It was important to be very transparent around our strategy so they knew what to expect from us in each of these markets.”
The bank was also active in the private placement sector, offering investors paper in tenors, sizes and structures that were specific to their needs.
Educating and maintaining a dialogue with investors was of the utmost importance in 2017.
“We were accustomed to selling pretty standardised products, the traditional senior, Tier 2, AT1s – I think all investors were quite familiar with those products,” Soler Ramos said.
“It was a special challenge this year to introduce this new asset class because we anticipated the publication of the law, using the contractual approach, so explaining to investors and removing uncertainty was particularly important this year.”