Santander Mexico Said to Plan $1 Billion Subordinated Bond Sale

Banco Santander SA’s Mexican unit is planning to sell $1 billion of the nation’s first Basel III bonds, adding to $54 billion issued worldwide by banks to meet tighter capital standards since the global financial crisis.

Grupo Financiero Santander Mexico SAB plans to sell the 10-year securities, which may yield about 6.5 percent, as soon as tomorrow, according to a person familiar with the offering who asked not to be identified because the terms aren’t set. Santander, Deutsche Bank AG, and Morgan Stanley are managing the sale, the person said.

The Mexico City-based lender is selling the notes to comply with the requirements under Basel III banking rules for Tier 2 capital as it plans to pay shareholders a $1.3 billion dividend this month, Santander said in a Dec. 13 statement. The hybrid securities are the first of their kind out of the Latin American country as they’ll allow for interest to be deferred or principal written down if the bank’s capital levels fall below a threshold.

Global watchdogs led by the Basel Committee on Banking Supervision are seeking to boost lenders’ balance sheets after the financial crisis exposed inadequate buffers against losses. The latest guidelines require a clause allowing regulators to write off capital, such as subordinated debt, if the issuer is in danger of becoming “non-viable.”

Banco do Brasil SA, Latin America’s biggest bank by assets, was the first lender in the region to sell securities designed to be compliant with Basel III when it issued bonds in 2012 that allow the bank to change its terms without bondholder consent.

Moody’s Investors Service has said it expects to rate Santander Mexico’s bonds Ba1 while Fitch Ratings projects a ranking of BB+, both one level below investment grade. Standard & Poor’s said it expects to rate the debt BB, two steps below.

Principal will be written down in part or in full if the bank’s common equity Tier 1 ratio, which takes into account risks for specific assets, falls to or below 4.5 percent, according to the person familiar with the sale. The bank expects to maintain a ratio of at least 12 percent, Santander said in a statement Dec. 13.

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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