BUT, TO BORROW the old cliché, you can’t take Spain out of Santander. The group has been in the news for a couple of very different reasons in the past week or so: it’s planning the partial IPO of its Mexican subsidiary, while it has also made a brave foray into the senior unsecured euro bond market – the first Spanish bank to attempt such a feat for around six months.
Santander’s partial spin-off of its Mexican unit (Grupo Financiero Santander, SAB de CV) via a dual-listed Mexico/US IPO won’t just boost ECM volumes in Mexico; it will make Latin American deal volume look a lot more respectable. The bank has filed for an offering of up to US$4bn to float about 25% of its subsidiary and it’s scheduled to price in September.
When you consider that Latin American equity and equity-related deal volumes year-to-date are a paltry US$14.5bn – and that BTG Pactual’s IPO accounted for close to US$2bn of that – you kind of get the picture.
Latin America is not far off being a rounding error in ECM, and even more so if you look at deal volumes relative to regional GDP. Regional deal totals exceed those of Africa and the Middle East (at US$7.3bn) but they pale into insignificance against Asia excluding Japan and Australia at US$100bn (if you include China A shares).
I ran through the LatAm ECM deal logs and there have been just three Mexican deals of size this year: Group Alfa’s partial IPO of its chemical unit Alpek raised US$787m; commercial property REIT Fibra Uno Administracion raised US$693m; and industrial real estate developer Corporacion Inmobiliaria Vesta’s IPO generated proceeds of US$255m.
That’s really disappointing, especially as earlier this year expectations for ECM deal flow out of Mexico had been pretty high. Those expectations have been severely tempered, but there’s still hope that infrastructure developer Promotora y Operadora de Infraestructura – which postponed its follow-on offering in May – could emerge this year, along with fellow infrastructure company IDEAL, and budget airline Interjet, whose IPO is still pipelined after postponing in 2011 owing to poor market conditions.
That said, Santander’s Mexican IPO will generate a decent chunk of cash for the Spanish lender. It follows the pattern it set in Brazil in 2009 when the group partially floated its Brazilian subsidiary to raise US$8bn, valuing the unit at close to US$50bn at the time.
Latin America contributes around half of the bank’s group profits (Brazil 26%; Mexico 12%), while the rest is distributed through Europe. In fact, Spain only contributed 14% of first-half profits. First-half 2012 Latin America profit was €2.24bn, down 9% from a year earlier, but only because of the accounting impact of the sale of its Colombian bank to Chile’s Corbanca (for US$1.16bn: Santander booked a capital gain of around US$775m).
The level paid by Santander was not sustainable when it came to mortgage lending
DESPITE ITS diversified revenue profile, the group just can’t shake off its Spanish roots and the problems of its embattled sovereign. When, on August 21, Santander became the first Spanish bank to attempt a senior unsecured bond in around six months, it had to pay up for the privilege of gaining market access. And some investors stayed away because Spanish banks have been scratched off their buy lists.
On the plus side, around 300 investors piled into the two-year trade with orders of more than €3bn for a €2bn deal. But why wouldn’t they if they were being offered a spread of 449bp over the OBL155, equivalent to 390bp over mid-swaps?
But even then, it looks like the 20bp premium to existing secondary paper wasn’t quite enough. The leads opted to price the new bonds at the tight end of guidance but they traded out in early trading before stabilising a couple of basis points wide of launch.
IFR’s story on the bonds quoted ING analysts highlighting the fact the level paid by Santander was not sustainable when it came to mortgage lending. They pointed out that the rate charged by Spanish banks for mortgage loans with a duration over three years approaches 3.5%. Two-year swap rates at 57bp and pricing of 390bp over mid-swaps exemplifies the nature of the problem.
THE GLOOM around Spain is unlikely to lift any time soon. The government is actively negotiating the conditions of an effective eurozone bailout that will likely see the EFSF buy Spanish government bonds in the primary market and the ECB would keep secondary levels below an agreed spread over Germany.
We’re unlikely to see any concrete proposals emerge until some weeks after the ECB meeting on September 6, but it it’s a question of when and on what basis, rather than if. The likelihood of Moody’s lowering Spanish government bonds to non-investment-grade won’t necessarily change anything, but it will provide a nice news front-end with which to angle the plans.
Talks about the size of any bailout are centred around the €300bn number, and among the conditions will be stringent monitoring and more concrete influence from Brussels over Mariano Rajoy’s budget and spending.
The first tranche of €30bn of Spain’s €100bn bank bailout – to be injected into Bankia and other nationalised banks (CatalunyaCaixa and NovaCaixaGalicia) – is also likely to be delayed, pending more details on how the money will be used and specifics on the bad bank being established to take dud real estate assets off the banks’ balance sheets.