Even the expected has the power to surprise. As 2014 ended, many analysts had flagged Banco Santander as one of the European banks most likely to raise new equity capital in 2015.
Virtually no one thought it would happen in the first week of the year. Nor did they predict that Santander would break into uncharted territory and raise as much as €7.5bn, not with a rights issue — which must be fully marketed to shareholders over several weeks — but with an accelerated bookbuild, conducted in one day or night.
Not only was this behaviour unprecedented, it also looked highly unlikely, after stockmarkets began 2015 with a whimper. On Monday January 5, the first working day for many market participants, the Euro Stoxx 50 index fell 3.7% — its worst day for several years.
You could have got very long odds from any equity capital market specialist on a record-breaking block trade coming by the end of the week.
Undaunted by volatility
Yet that is precisely what Santander did. Having been working with Goldman Sachs on the idea for weeks, bringing in UBS as a joint bookrunner in the later stages of preparations, Europe’s second largest bank (after HSBC) began presounding key investors in the US on Tuesday January 6 — even though it was a second dire day for equities.
The deal was disclosed during the day on Thursday, possibly because of a leak that it was coming. The same day, having seen feedback from over 20 investors, Santander’s board approved a capital increase of up to 9.9%, aiming to raise €7.5bn.
Each country sets rules for how much new equity a company can raise without having to give its existing shareholders rights to buy the new shares before they are offered to anyone else. In Spain, as in the UK, the limit is 10%.
Capital increases below that level are regularly done as block trades — and for most companies, the amount involved is fairly small and manageable for investors to digest at short notice.
But for the biggest companies, even a capital increase that is modest in percentage terms can strain the capacity of block trade execution — so deals that run to several billions in absolute size are usually done as rights issues.
That was the case, for example, when Barclays raised £6.1bn in October 2013 and Deutsche Bank €6.8bn in June 2014.
Rights issues are often done at deep discounts of perhaps 30% or 40% to the market share price, and with full underwriting by investment banks. That combination should mean the issuer is guaranteed the funds it needs. But there is still considerable risk involved. Conditions can change during the marketing period, the share price can fall dangerously close to the discounted price, shareholders can decline to take up their rights.
A new path
Santander decided to try a different way. It chose to raise €7.5bn in just one night: the biggest block trade ever tried outside the US.
The UK government’s £4.2bn (€5bn) sale of Lloyds Bank shares in March 2014 had shown that very large block trades were possible in Europe, for blue chip stocks.
Santander’s deal was arguably more ambitious, because new capital was being raised, so the deal was dilutive.
What made Santander’s move so right is that it acknowledged the high volatility in Europe’s stockmarkets, and worked with it. A long, drawn-out rights issue could have raised more money — €7.5bn was just about the full 9.9% allowed for Santander through a block — but would have had to weather every political or economic storm in Europe over the next few weeks.
Best of both worlds
What Santander, Goldman and UBS came up with was a structure that combined some of the advantages of a rights issue and a block trade.
Hearing of the deal on Thursday afternoon, ECM bankers all thought it was unlikely a sale that big would be underwritten.
But Goldman Sachs and UBS were so confident in the deal’s success that they did indeed underwrite the entire amount. Goldman would have been willing to guarantee the €7.5bn even on its own.
We don’t know the price or the details of the underwriting. But the share price achieved for Santander, of €6.18, was a discount of 9.9% to the pre-announcement price.
Before launch, the lead banks had investors lined up for about half the amount — but the gamble was still substantial.
Santander arguably achieved the best of both worlds: an underwritten deal, a modest discount, the benefits of some presounding with investors, and a swift, one day execution — without the hassle of offering rights to its thousands of retail shareholders, estimated to own 46% of the bank.
That the deal got done showed confidence from the lead banks, and from investors, in Santander, and in its new management under Ana Patricia Botín.
It was particularly significant that US investors, which took a big chunk of the book, are once again willing to take exposure to Europe, and to Spain.
Ragged aftermarket
The deal was not an unblemished triumph. Santander’s shares fell sharply the day after the sale, ending Friday about 13.7% below the pre-announcement price.
Rival bankers said the book, though oversubscribed, had not been big enough or of sufficient quality — hedge funds had been allocated more shares than they were expecting and had turned sour on the deal.
It was a nasty experience for some hedge funds, which had been hoping to put a gloomy 2014 behind them and start the year with some trading gains. Fund managers will look very carefully at the next deal that comes along.
Nevertheless, Santander has achieved much. It has decisively answered critics in the equity and debt markets that it was thinly capitalised.
It has raised the ceiling for European accelerated bookbuilds from €5bn to €7.5bn. And it has shown that even a very large capital increase can be done as a block trade.
That gives blue chip companies a whole new set of options about how they go about raising capital. Santander’s jumbo ‘non-rights’ issue will not be the last.
For Europe’s big banks — many of which might also like another chunk of capital — and for the ECM market, the start to 2015 could hardly have been better.