In the end, Santander decided not to call its AT1 bond issued in euro in 2014 on the first call date, which was a first for the asset class.
This was probably a lack of foresight from the Spanish bank: it did not refinance its 2019 AT1 debt early, unlike most other banks. As a result, Santander had probably been unable to obtain regulatory approval before the redemption, which is required before each call in order to ensure the issuer has sufficient capital and that the refinancing costs are at least equal to the cost of the existing debt.
However, this non-call was widely anticipated by the market through spread widening in 2018 (making the call less attractive) and following statements made previously by the finance director. The impact was therefore negligible, both on the non-called Santander bond (-1% after the announcement, then +0.5% in the following days) and on the AT1 market, which rose by 0.2%.
What are the likely consequences of this first ever non-call?
The Santander bond in question, which was issued in 2014, is callable every three months, with the next call date being 13/03/2019. Although the bank is not allowed to state its intention to exercise the call from a regulatory standpoint, we expect it to proceed at this next opportunity, as the bond appears undervalued to us, yielding 12.10% (annualised call rate) and 6.7% (perpetual maturity), with Santander having rushed to issue a new bond in early February.
It should not be assumed that other banks will roll over their AT1 subordinated debt, and we recommend investing on a case-by-case basis, particularly on short calls, although we consider this to carry a moderate risk. It is worth keeping a close eye on UK banks with bonds maturing in the second half of 2019, given the extreme uncertainty over Brexit…unless an agreement can be reached before then.
All in all, this event does not seem to have had a significant impact on the subordinated bank debt market, which has continued to show strong growth since the start of the year, helped by banks’ solid fundamentals, the accommodative stance of the central banks and the easing of some of the political risks at play.
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