Santander Joins Danske Selling AT1 Debt in Market’s Busiest Week

Banco Santander SA (SAN) and Danske Bank A/S (DANSKE) are marketing additional Tier 1 bonds in the busiest week for issuance of the subordinated bank debt since Banco Bilbao Vizcaya Argentaria SA opened the market in April.

Santander plans to sell 1.5 billion euros ($2 billion) of the contingent convertible notes while Denmark’s largest bank is marketing 750 million euros of the debt, people familiar with the deals said. Nationwide Building Society sold the first notes in pounds yesterday, taking total issuance of additional Tier 1 debt by European lenders before today to about $16.3 billion, according to data compiled by Bloomberg.

Issuance is growing as lenders move to comply with new European Union regulations that aim to pass bailout costs from troubled banks to investors rather than taxpayers. Demand for riskier assets is also fueling sales of the undated securities, which can be written down or converted into stock if a lender breaches preset triggers on capital ratios.

“The audience is expanding for this product every day,” said Mark Holman, chief executive officer of TwentyFour Asset Management LLP in London, which oversees about $4 billion of fixed-income assets. “As you get more AT1 bonds issued, the fear factor goes away.”

Additional Tier 1 notes are the riskiest form of bank debt. They have no fixed maturities and coupon payments can be deferred at the issuer’s discretion.

Danske Bank’s notes, which can be bought back by the Copenhagen-based lender after six years, will pay a coupon of 5.75 percent, according to a person familiar with the sale. That’s the lowest yet for additional Tier 1 debt, data compiled by Bloomberg show.

‘Aggressive Pricing’

Santander is marketing its bonds, redeemable after five years, to pay 6.25 percent, another person said. The securities will convert into equity if the Madrid-based bank’s capital ratio fall below 5.125 percent.

Both lenders are selling the bonds for the first time and the sale from Danske will be the first from a Scandinavian bank, according to data compiled by Bloomberg.

“These are reasonably strong credits that should trade well,” according to Simon Adamson, an analyst at CreditSights. The banks “have all been building large order books for their proposed additional Tier 1 issues this week, meaning they will probably be fairly aggressive on pricing,” he wrote in a note.

The average yield investors demand to hold additional Tier 1 bonds and other contingent capital notes has fallen 36 basis points this year to 7.08 percent, according to Bank of America Merrill Lynch index data. For junk-rated corporate bonds in euros, yields have dropped to 4.48 percent, three basis points from a record low, the data show.

Junk Bonds

Another lender planning to issue additional Tier 1 bonds is KBC Groep NV. (KBC) Belgium’s biggest bank by market value will meet investors in Europe and Asia starting March 10 to market the securities in euros, according to a person familiar with the plan. The notes, which can be called after five years, will be convertible to equity if capital ratio fall below 5.125 percent, the person said.

Non-financial companies are also coming to the market with high-yield deals. German building materials supplier HeidelbergCement AG (HEI) sold 500 million euros of five-year bonds paying a coupon of 2.25 percent, according to data compiled by Bloomberg. Moody’s Investors Service may rate the notes Ba1 or one step below investment grade.

Obrascon Huarte Lain (OHL) SA, a Spanish builder, issued 400 million euros of eight-year securities to yield 4.75 percent, Bloomberg data show. The notes, to be rated Ba3 by Moody’s, can be bought back by the Madrid-based company after four years.

Premier Foods

Labeyrie Fine Foods SAS, a French maker of foie gras and other specialty foods, is marketing 275 million euros of seven-year bonds that may be priced to yield about 5.75 percent, according to another person. A bond sale would be the first for the St. Vincent de Tyrosse-based company, Bloomberg data show.

In the sterling high-yield market, Premier Foods Plc (PFD), the British maker of Mr. Kipling cakes, is marketing 150 million pounds ($251 million) to 175 million pounds of six-year floating-rate notes and 300 million pounds to 325 million pounds of seven-year bonds, a person with knowledge of the transaction said. The St. Albans, England-based company will use the proceeds to help refinance debt.

The cost of insuring junk-rated corporate bonds against losses fell to the lowest since July 2007, with the Markit iTraxx Crossover index of credit-default swaps on 50 European companies with speculative-grade ratings dropping 7 basis points to 254 basis points at 3:37 p.m. in London.

To contact the reporter on this story: Katie Linsell in Madrid at klinsell@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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