Santander buys back a 'CoCo' of 1,000 million euros, after postponing its amortization in September

MADRID, 22 Nov.

Santander buys back a 'CoCo' of 1,000 million euros, after postponing its amortization in September


Banco Santander has agreed to proceed with the voluntary early amortization of a contingent convertible bond - commonly known as 'CoCo' - of 1,000 million euros, after deciding to postpone its repurchase last September.

The early amortization has been authorized by the European Central Bank (ECB) and will take place on December 29, as reported by the entity to the National Securities Market Commission (CNMV) this Wednesday.

The amortization price, consisting of the nominal value in circulation of each preferred participation plus an amount equal to the remuneration associated with each of them accrued until December 29 (exclusive) and not paid, will be payable on said date to the holders of the shares.

In this way, Santander has finally decided to go to the second optional window that it had to redeem the bond, after not going to the first settlement window set for September 29.

'CoCos' are contingent convertible bonds issued by banks, they are perpetual and count as additional Tier 1 capital, hence they are also known as AT1 issues.

These bonds include an optional first window of liquidity to which entities usually resort, although they can also postpone their settlement, as they are perpetual. To achieve this, once the first one is rejected, liquidity windows are opened every three months.

In addition, these bonds - which are placed with institutional investors - can be converted into ordinary shares of the entity under certain circumstances, such as, for example, if the CET1 capital ratio of an entity falls to a certain level.

At the end of August, Santander decided that it would not repurchase the 1,000 euro issue, postponing the amortization until favorable conditions were met given the increase in the cost of these issues due to the change in the order of priority in the sale of Credit Suisse to UBS last March.

In this regard, it is worth highlighting that shareholders are usually the first to be affected in the event of the resolution of an entity, although in the case of the Swiss bank, the holders of 'CoCos' were the first to suffer losses in the value of their bonds. , while shareholders maintained a certain value for their shares, which has increased the cost of issuing AT1 bonds.

In fact, the issue that Santander is going to redeem has a coupon of 5.25%, while last week it placed a double 'CoCo' of 2.5 billion dollars (around 2.3 billion euros) at a price of 9.625% , after starting with an interest of 10%. In fact, one of the objectives considered for this issue was, in fact, the refinancing of existing capital instruments.

It should be taken into account that banking regulation requires maintaining certain levels of AT1 assets, which is why entities usually replace some issues with new ones to maintain or increase their AT1 capital buffers.

It is not the first time that the entity decides to postpone the repurchase of a 'CoCo'. Already in 2019, Santander became the first entity to postpone the amortization of one of these bonds, of 1,500 million euros, which it had issued in 2014, since at that time it did not make sense and it was more expensive to repurchase it than to continue paying interest to the bondholders. However, in 2020 it finally decided to proceed with its amortization.