Bloomberg News

Santander Junior Bonds Fall on Discounted Swap for Senior Debt

November 16, 2011

Nov. 16 (Bloomberg) -- Subordinated bonds of Banco Santander SA fell after Spain’s largest lender offered to exchange nine of its Tier 2 bonds for senior notes at a discount to help bolster capital ratios.

The yield premium investors demand to hold the Madrid-based lender’s 450 million euros ($610 million) of 6.5 percent notes maturing in 2019 rather than benchmark government debt jumped 156 basis points to 1,083 basis points, according to Bloomberg Bond Trader prices. Spreads on the securities were as tight as 372 basis points in May, data show.

Bank subordinated debt has plunged in value in Europe on concern holders of the notes may be forced to accept equity in a crisis as part of a so-called bail-in. Santander, which has the right and not the obligation to redeem all the 6.8 billion euros of notes early, said that from now on it will decide whether to exercise the call solely on economic grounds.

“We see no benefit for investors of being put into a more senior position at a bank where bail-in risk appears remote today,” Hank Calenti, a credit analyst at Societe Generale SA in London, wrote in a note to clients. “Investors will now face liquidity risk in these bonds if they do not exchange and those that exchange are paying for shorter maturity.”

Calenti estimates, assuming full conversion, the bank will raise 640 million euros to increase core capital, helping it reach the 6.4 billion euros it needs to achieve levels imposed by European regulators.

By saying it will call the notes on economic grounds only, Santander may be hindering access to the capital markets and giving investors grounds to question its ability to raise the capital it needs, according to Calenti.

--Editors: Michael Shanahan, Andrew Reierson

To contact the reporter on this story: John Glover in London at

To contact the editor responsible for this story: Paul Armstrong at

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