Thread by @jeuasommenulle

So I've been asked my thoughts on the #AT1 non call decision by #Santander so here's a quick thread on this. Careful, reader, this is not 50% as fun as a thread on #Deutsche 🤪🤣#Coco

So what happened? Yesterday, Santander decided not to call its 6.25% AT1 bond. We were all watching because it was the first bond to come to call date with no obvious decision.

This was more or less expected. Some (@BondHack e.g.) saw it coming, some [@subfincredit e.g.) were more optimistic. Overall, it's total b/s to say the market was shocked. It was more a popcorn type of event than the DB non call in 2008

Why expecting no call? Back in Jan the bond was at 95, 50% investors I talked to expected call 50% non call. Even yesterday, people was split. Honestly if someone tells you it's a big "shock" they're looking for drama.

But what was odd and pissed off many is the communication. Santander refinanced the bond 42bps cheaper than the 6.25 so tons of people thought this meant CALL. The bond even briefly traded at 100 on that day 🤣🤣 (yes, if you're the one who bought, I feel sorry for u)

Worse: when they first "skipped" the call notice expiry date, some investors freaked out and Santander took the pain to issue a press release to say that the day count was wrong and the deadline Tuesday instead of Friday. Why would you do that if you don't intend to call ????????

I have two theories: one is EPIC trolling, the second one is (see below)

Anyway, the market reacted a bit. But really just a bit. If all you can do after all the popcorn is -1pp compared to when the rumor started to spread and flat vs. the actual non cal...

So to all asking what's the impact for the global AT1 market my answer is an enormous SHRUG.

Average spread on the AT1 market is 450bps-ish, Tier 2 (same credit risk imho) is 200bps-ish so you're paid 250bps-ish for coupon risk (which is close to inexistent for many of the AT1 issuers) and extension risk.

So if you think a) the AT1 market is not aware of the extension risk and is like the hybrid market in 2008 or b) that extension risk is not compensated then I suggest you take a cold long look at the AT1 market again

Last but not least, wtf did they not call? Honestly, it's difficult to say. My most basic answer is "it's f**** Santander" !!! They have always been weird and investor unfriendly.

Let me tell you two very recent stories about them.
a) they had old capital bonds issued out of SPVs. Because of proposed new rules, investors believed they would not even count for MREL purposes anymore and would be called. What did Santander do ? Call ? NOOOOO.

They hired tons of lawyers, and collapsed the SPV (mergers) in the hope of making the bonds MREL eligible again and reducing the incentive to call (and they did that before the final rules are even known 🤪)

b) they had a perp fixed for life bond trading above par. They called *after* the call notice expiry. Investors screamed, they blamed a clerical error bla bla lawyers were involved and they finally backed down and did not call.

But there is a twist : everyone expected they would get a revenge and call at the next call date. But WTF !? they didn't !!!! Maybe they've just lost the call button.

So what are the theories for not calling ?
1) supervisors do not agree. I don't buy it for one second, especially after the bond issuance last week.
2) clerical error. very unlikely with all the popcorn and press releases.

3) they believe it's in their economic interest not to call. True the USD was 42bps inside, but EUR is more expensive and they would have probably paid around 10bps above the 6.25's backend. Back in December on a roadshow the CFO said the "pain threshold" was more around 25-50bps

But maybe now they believe it's lower and they don't care about their reputation (stupid idea if you ask me.)

Last theory maybe most likely: spanish press reported (see @nicolasmsarries e.g.) that the internal debate at santander was still going on yesterday !!! So there is always the chance that they simply decided to wait a few weeks to really decide in June because they're undecided🧐