Bond Market Worth $200 bn Baffled With Santander’s Bold Move To Go Against Bond Repayment

  • Feb 15, 2019 GMT
  • Team Kalkine
Bond Market Worth $200 bn Baffled With Santander’s Bold Move To Go Against Bond Repayment

Santander Group, the Spanish multinational bank dealing in retail, commercial and financial services, is the largest Spanish Banking institution. The bank is a component of Euro Stoxx 50 index; also, the bank stood at #31 rank in 16th annual Forbes Global 2000 list which ranks the publicly-traded companies from 60 countries based on their size.

Santander has been in the news for all the wrong reasons; earlier it was the withdrawal on offer to hire Andrea Orcel at the position of chief executive, and now its decision not to repay Euro 1.5 bn capital bonds. It was on Tuesday that the announcement came, Santander declined early repayment of the capital bond.

Santander

As a result of the above announcement, the bondholders saw a steep fall in the value of their bonds, but they have nothing to their rescue. The bank is under no obligation at all to pay back the bond now.

The $200 billion bond market for the riskiest bank debt which can be written off during stress, called “additional tier 1” or more popularly “COCO” bond, was taken aback by this news. It has been a general understanding in the UK financial market that the bank bonds are honoured at the very first opportunity and they hardly carry any risk (other than the usual trade conditions) as an investment. Such a decision close to a decade ago by Deutsche Bank got the market in a fix. However, the regulators in Europe wanted this phenomenon.

Many bank’s treasury departments were running sweepstakes on Santander’s pending decision, if it would be a call decision or not by the bank. While there was no uncertainty on this a few weeks back, an unusual deal came from Santander’s shed just a couple of days back.

Santander launched the sale of a new COCO bond worth $ 1.2 billion, further strengthening the market sentiment of repayment of its existing obligation. It was also the sheer timing which suggested the same.

Analysts at JPMorgan said that it still seems that the new bond is issued to replace the old one and that this was just a technical glitch owing to regulatory approvals. They say that the bond should be called now in three months when Santander can revisit its decision.

Although Santander’s bond stooped quite low after this, over-all COCO market didn’t take a hit as it closed higher on Tuesday.

While many people may be disappointed with the decision by Santander Bank, the fact was that the decision could go either way, as also mentioned by the bank earlier that the call they would take would be – basis the economic conditions.

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