Santander Markets $1.5 Billion of CoCos to Meet Capital Rule

Banco Santander SA is selling $1.5 billion of contingent convertible notes to comply with new capital regulations, in its first sale of the riskiest bank debt in the U.S. currency.

Spain’s biggest bank will price the additional Tier 1 notes to yield 6.375 percent, according to a person with knowledge of the matter, who asked not to be identified because they’re not authorized to speak about it. The undated notes will convert to equity if the bank’s capital falls to 5.125 percent of assets weighted by risk and the company has the right to buy them back after five years, the person said.

Sales of the bonds that can be written off or converted to shares in a crisis are increasing as lenders move to comply with new European Union regulations that aim to pass bailout costs from troubled banks to investors rather than taxpayers. Santander will likely sell as much as 8 billion euros ($11 billion) of additional Tier 1 debt, according to John Raymond, an analyst at CreditSights Inc. in London.

“I’m a bit surprised they’re going that high” with the yield, said Raymond. He said he expected the lender to offer interest of about 6 percent.

The Madrid-based lender began marketing the bonds with a proposed coupon of about 6.625 percent and said in a filing that it would issue as much as $2.5 billion of the securities.

Santander issued 1.5 billion euros of 6.25 percent additional Tier 1 bonds in March, according to data compiled by Bloomberg. The notes, which were priced at par, have since increased to 102.13 cents on the euro to yield 5.74 percent, according to Bloomberg generic prices.

Banco Bilbao Vizcaya Argentaria SA, the country’s second-largest bank, last year issued $1.5 billion of 9 percent additional Tier 1 securities that are now quoted at 110 cents on the dollar to yield about 6.15 percent, according to prices on Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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