Banco Santander SA (SAN) hired banks to manage a debut sale of additional Tier 1 securities as demand for high-risk debt cuts borrowing costs.
Spain’s biggest lender plans to sell euro-denominated notes that will convert into equity if capital ratios fall below 5.125 percent, according to a person familiar with the matter. The undated notes can be redeemed after five years.
Additional Tier 1 notes offer higher yields than conventional bonds because they comply with new European Union rules designed to make investors, rather than taxpayers, contribute to a bank’s financial rescue. Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s second-largest lender, and Credit Agricole SA (ACA) issued the notes this year.
“This is going to cause a lot of interest because it wasn’t one of the names the market had expected,” said Daniel Bjork, a fund manager at Swisscanto Asset Management in Zurich, which has more than $56 billion of assets. “There’s a lot of positive momentum around Spain at present, so this is very good timing from Santander’s point of view.”
Moody’s Investors Service raised Spain’s credit rating to Baa2 from Baa3 on Feb. 21, citing a rebalancing of the economy toward more sustainable growth and progress made in implementing structural reforms.
Danske Bank A/S (DANSKE) is also holding talks with investors to issue at least 500 million euros of Additional Tier 1 bonds, a person familiar with the plans said separately. The notes will be undated and can be redeemed after six years, the person said.
Contingent capital securities, known as CoCo bonds, convert to equity or are written down to allow banks to replenish capital instead of having to seek taxpayer support. To compensate investors for the extra risk, the average coupon on the securities in Bank of America’s Contingent Capital Index is 7.87 percent.
In contrast, the average coupon on high-yield bonds worldwide is 7.27 percent, while non-financial companies in Europe with junk ratings pay 6.86 percent, according to Bank of America index data.
Bank of America Merrill Lynch, Citigroup Inc. and UBS AG are helping Santander arrange presentations to investors in Europe starting March 3, the person said.
About $14.6 billion of the securities has been issued by European banks in euros and dollars, data compiled by Bloomberg show.
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