4 - 2/2Santander made history when it left its €1.5bn 6.25% AT1 outstanding beyond its first call date last March.
Rather than refinance the bonds, the bank decided that it would be more prudent to allow the coupon on the debt to reset to 541bp over five year euro swaps.
This approach was controversial, partly because there had previously been a long-standing tradition that banks would always call their capital instruments at the first opportunity.
Santander was instead pursuing an “economic” call policy, based on what it thought would be kindest to its profit and loss statement.
The bank’s decision appeared to be vindicated when it surfaced in the euro market last week.
It tapped into an extreme thirst for returns to price €1.25bn of perpetual non-call five AT1 capital at a yield that, in spread terms, worked out to about 453.4bp over mid-swaps.
The new deal will now replace the older series of AT1 bonds, allowing Santander to shave about 100bp from its annual cost of debt capital.
But despite the success of the bank’s approach to the AT1 market, there is little evidence to suggest that others will be rushing to follow in its footsteps.
For the most part, issuers still believe in the value of being seen as hyper-friendly towards credit investors.
In the 11 months since Santander broke with call tradition, most European banks have had clear economic reasons for redeeming and refinancing their capital securities as they have come up for call.
But there have also been a few instances where they have shown that they are willing to pay up to access the market afresh.
For example, the interest rate on a new $500m AT1 from Swedbank last August was about 50bp higher than the reset spread on the bond it had been looking to replace.
The logic behind this sort of behaviour rests on a pervasive idea: the less drama you create in the market, the lower and more predictable your financing costs will be over the longer term.
On the face of it, Santander blew this idea out of the water when it clocked up a €10bn order book on its return to the euro AT1 market last week — no mean feat, even when considering how hungry investors have been for yield.
But looking more closely, some market participants still thought they saw a faint glow of controversy around the deal execution.
The lead managers felt it was prudent to include a healthy premium within the final 4.375% coupon, for example. This was clear for all to see a day or so later, when the bonds had jumped more than two cash points higher in the secondary market.
That is hardly enough to suggest that Santander put a foot wrong, of course. After all, the bank has reduced its interest expenditure significantly by holding off on calling and replacing its €1.5bn 6.25% AT1.
But the whole saga is likely be enough to dissuade other issuers from following suit.
It is instructive that Santander remains the only European bank to have passed up an option to call an AT1.
The industry is, for the most part, pretty conservative when it comes to capital management. Most firms will feel as though it simply isn’t worth the hassle of becoming the next Santander just to make a bit of a saving in the AT1 market, particularly if new issuance conditions remain supportive.
As one head of FIG DCM put it: “It’s probably not a lot of fun being the subject of press headlines and speculation for 12 months, all else equal.”
It had seemed for a while as though the European banking sector might be headed towards a sea change in the way it approaches call decisions for capital securities.
But old habits die hard. Rather than opening the way for a stampede of “economic” AT1 extensions, Santander’s actions look more as though they have confirmed to banks that there was nothing really wrong with the way things were.