Santander feels the heat from bondholders after rolling-over bail-in bonds

BANCO Santander reminded investors that juicy bonds can come with nasty surprises.

The Spanish lender rattled the bank Additional Tier 1 market by saying it will skip an option to “call” or redeem €1.5bn of perpetual contingent-convertible (CoCo) notes next month, sending the bonds tumbling.

The bank compounded investor displeasure by releasing the news late on the deadline day for a decision and after issuing a new dollar AT1 just last week.

So-called CoCo bonds were introduced after the crash and can be used to bail-in bond holders by converting debt to equity in a crisis.

The Santander CoCo bonds don’t have a fixed maturity but are callable at fixed intervals.

“The handling of the situation was truly disastrous,” said Timothee Pubellier, a portfolio manager at Financiere de LA Cite, which holds Santander CoCos.

“Credit investors will need some serious new issue premium to touch that name again.”

The euro AT1s tumbled to 97 cents on the euro following Santander’s announcement, after climbing to almost face value last week.

The decision to skip the call may drive up costs across the market for the regulatory-driven bank bonds as investors have traditionally priced CoCos in the expectation that they will be called at the first opportunity.

“This is very surprising and it is a really bad news for CoCos, specially for those that have low coupon for the first call,” said Alfonso Benito, chief investment officer at Spanish asset manager Dunas Capital.

“The market is going to request additional premium for this kind of product in the future.”

Santander’s decision had become a test case for AT1s because it was the first highly uncertain call since the creation of the risk-laden bonds following the financial crisis.