Santander has given the bondholders a painful lesson, but necessary. The Spanish bank opted yesterday not to amortize the hybrid bonds at the first opportunity, disobeying a market convention. At least the creditors know that the banks will put the interests of the shareholders above theirs.
The bank of Ana Botín has been involved in a delicate debate about the ethics of the bond market. After the financial crisis of 2008, regulators realized that banks' perpetual debt was anything but perpetual, because securities were structured with coupons that jumped after, say, five years, to incentivize banks to redeem them in advance. This created the presumption that bonds would always be repurchased, making an extension a sign of potential distress.
The post-crisis hybrid securities also contained early redemption options, but without increasing the penalty coupon, which means that, in theory, banks should only meet the demand if it were possible to refinance the bond at an interest rate. Similar or cheaper. So far, banks have avoided bothering bondholders. However, the rise in the yields of bank debt in recent months has made some bonds, such as 1,500 million euros in coconuts of Santander, which have a first purchase option in March, are much more expensive to refinance.
Santander's decision should have been clear. After the March purchase option, the coconuts they will pay a coupon equivalent to a differential of 541 basis points over the interbank swap rates. But replacing them with new bonds would have cost around 100 basis points more, according to a banker.
However, investors had begun to hope that Santander could amortize the securities. The bank added to the confusion: last week it issued a new hybrid bond to US investors, which was interpreted as a sign that it intended to go to the March purchase option. The price of the bond in the secondary market jumped from around 97% of its nominal value to around 99%. Now it seems that this bond was issued to pay a different value, whose purchase option is in May.
The fact that Santander has not resorted to the purchase option provides some clarity, even if the bondholders feel annoyed. But the case will not always be clear. The Spanish bank has issued all the hybrid debt it needs, a fact that can make it more willing to take a hard approach. The weakest banks that still have to issue will want to keep bondholders happy. Regulators, however, will be careful not to allow them to withdraw cheap capital. This leaves ample room for maneuver for more disruptions in the bond market.
The authors are columnists of Reuters Breakingviews. The opinions are yours. The translation, of Carlos Gómez Down, it is the responsibility of Five days