(More Bank) – Banco Santander SA reminded investors that juicy bonds can lead to bad surprises.

The Spanish lender failed the additional Tier 1 capital market by announcing that it would forego an option to call 1.5 billion euros ($ 1.7 billion) from investors. Convertible bonds perpetual rate next month, which would make the bonds tumble. The announcement was made Tuesday night, just at the deadline of the decision, after the bank left investors in the dark for weeks about the option to buy and to the Following another transaction, AT1 dollar ticket sales on Wednesday.

"The management of the situation has been really disastrous," said Timothee Pubellier, portfolio manager at Financiere de LA Cité SAS, which owns the Santander CoCos. "Credit investors will need a serious new issue premium to hit that name again."

The Spanish bank opted against a call because of a "requirement to assess the economic situation and balance the interests of all investors," said a spokesman for the company in a email. "We will continue to monitor the market closely and seek to exercise buying options where we believe it is right to do it," he said.

The euro AT1s dropped to 97 cents per euro after the announcement. Tickets traded almost at par last week when the CoCo dollar sale fueled the optimism of a call.

The decision to skip the call may result in higher costs in the market for bank bonds subject to regulation, with investors traditionally setting prices for CoCos in the hope of being called to the first opportunity. This could also prompt other banks to do the same, presenting an imminent market risk, since the number of AT1s whose post-extension rates are low and approaching the date of their first call will resume in the next year.

"It's very surprising and it's a very bad news for CoCos, especially for those who have a low coupon for the first call," said Alfonso Benito, director of investments at the manager of the CoCos. 39; Spanish assets Dunas Capital. "The market will ask for an additional premium for this type of product in the future."

The yield to maturity of the AT1s in euros has widened to 5.7% after the announcement without appeal. The bank's AT1s with a May call option slipped to 97.8 cents. Its US deposit receipts traded slightly up in New York, rising 0.7% to $ 4.55.

Making the call may be cheaper in Santander than repurchasing the notes and selling new ones, as the variable rate after extension of the existing notes is lower than the current market financing costs. Faced with this, the bank had to weigh the reputational potential to increase borrowing costs in its future subordinated issues. Other banks will have to do similar calculations in the coming months.

Banks have rarely broken with the convention of calling subordinated notes at the first opportunity. Deutsche Bank AG shook the credit markets in 2008 by skipping a purchase option, which resulted in losses for investors. The assumptions were again shaken in 2016 when Standard Chartered Plc and the German lender Commerzbank AG extended similar obligations.

Market maturation

For some, the decision had merit. The repayment is voluntary and the regulators did not encourage the banks to call the notes because they did not include a guaranteed coupon in the design of the notes.

This is a "sign of maturing market," said Steve Hussey, head of financial research at AllianceBernstein Holding LP. "That's what banks are supposed to do. It should be an economic decision and not a reputation. "

AT1s are the most risky form of bank debt because the notes may be written off or converted into shares if the lender's capital falls too low. Lenders can also ignore coupon payments without triggering a failure. These risks for investors are offset by the high coupons that have allowed investors in euros to obtain total returns of 3.9% on CoCos over the past year, according to the index data. More Bank Barclays. This compares with only 0.5% for senior bank notes in euros.

(Adds the stock price in the eighth paragraph.)

– With the help of Macarena Munoz.

To contact the reporters on this story: Tasos Vossos in London at tvossos@More Bank.net, John Glover in London at johnglover@More Bank.net

To contact the editors in charge of this story: Hannah Benjamin at hbenjamin1@More Bank.net, Vivianne Rodrigues at vrodrigues3@More Bank.net, Neil Denslow

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