Santander has announced this evening that it will not be calling its 6.25% EUR AT1 CoCo (Callable on the 12th of March with 30 days’ notice). Our expectation has always been that Santander would not call the bond at the first call date given the current market environment. The bank has always been clear with bondholders that they would only call if possible to refinance at cheaper levels – a pure economic approach.

Nevertheless the bank issued $1.2bn of AT1 CoCos last Wednesday – which increased market expectations that they would call the instrument. The timing of the deal – less than a week before the deadline to hand the call notice to bondholders had further increased hopes of an imminent call. We believe that the decision not to call was due to not getting regulatory approval on time (banks are not allowed to redeem capital securities without prior consent of the regulator) given the very short timeline after the $ deal was printed. We also believe that the bank will call the bond in the future as it has already been pre-financed.

The instrument remains highly attractive [even though we don’t own it – we own others which are also attractive]  with the couponresetting to the five year mid-swap rate plus 541bps – equivalent to an all-in coupon of c 5.5% and the YTW remains very attractive at 6.8%. The bond is callable every quarter which mitigates the downside risk.  Given the price is around 97.5  –

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