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Friday, 17 November 2017

Sterling Bond: Santander UK’s £750m AT1

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Leading the way

Santander UK navigated a notoriously tricky market to land the UK’s first Additional Tier 1 bond with an aggressive structure that could see the bonds written off permanently, reopening the dormant European AT1 market in the process.

It was the inaugural publicly syndicated bond from Santander UK Group Holdings, the entity set up in 2014 in response to the regulatory push for major UK banks to shift their issuance from the operating company to the holding company.

The bank’s private ownership structure and regulatory requirements meant it became the first UK issuer to structure an AT1 bond with a permanent writedown feature. That means investors could see their holdings wiped out completely should its CET1 ratio slip below 7%.

The deal coincided with a sterling and US dollar cash tender designed to redeem selected legacy Tier 1 instruments at the operating company level.

The success of the deal represented an important statement on the credit of a company that was then still eyeing a flotation.

The response left little doubt as to investors’ belief in the credit. The perpetual non-call seven bonds pulled in more than £5bn in orders, allowing lead managers to tighten initial talk from 7.50%–7.75% to guidance of 7.375%–7.50%. It fixed at the tight end for a £750m deal, the maximum size target.

Issued in early June, it was the first benchmark sterling AT1 bond since the previous June. It was also the European market’s first benchmark AT1 in any currency since DNB Bank’s Reg S dollar deal in March after persistent volatility sidelined issuers.

The result reflected an assiduous marketing process that saw two teams meet more than 100 investors across the UK and parts of Europe over three days.

“The bond is very subordinated, so, from our perspective, it was critical to ensure investors understood the credit well – the business profile and the relative stability of our capital ratios and the earnings stream,” said Stephen Jones, chief financial officer at Santander UK, at the time of the deal.

The issuer announced prior to pricing that its parent would pick up 13.5% of the new notes.

“It is helpful for third-party investors, as Santander is motivated that it never hits the 7% trigger – that sends a reassuring message,” said Jones.

The trade was bid 75bp higher in the secondary market at the close of business, having been priced at par.

Bank of America Merrill Lynch, Barclays, Morgan Stanley, Santander and UBS led the trade. Santander and UBS were also structuring advisers.

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To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com .

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