Deal of the Month: Banco Santander

A report on the €1.5 billion issue from Banco Santander which reopened the Spanish covered bond market.

Santander reopened the Spanish covered bond, or cedulas, market in May with the first such deal for almost a year. The previous new issue in the sector came in June 2008. The deal came days after the European Central Bank's announcement, on May 8, of a EUR60 billion purchase plan of covered bonds, but the leads insist that while this may have helped execution, the bond would have found an audience without it.

"Santander had been considering something for a while and although we don't know what would have happened without the ECB decision there probably would have been an issue," says Antoine Maurel, a director in debt capital markets at HSBC. "Yes, it would not have been so successful and the price would probably have been different, but Santander's objective was to reopen the market as soon as possible: the ECB just gave a further push. Santander was ready to move and within the cedulas market it was definitely the right name to do it."

The deal's order book was opened with initial guidance in the area of 125 basis points over mid-swaps, eventually pricing at 120bp over. Credit understands that the expected spread was more in the region of 140bp before the ECB's announcement.

Maurel says the issuer saw no reason why the Spanish covered bond market should be closed while other comparable markets, such as senior unsecured non-guaranteed, were open. "The market had improved a lot before the ECB's announcement. Also, Santander had earlier decided not to use a government guarantee to issue senior debt, leaving them the two options of issuing either a senior unguaranteed deal or a covered bond."

Prior to the draining of liquidity from the covered bond market last year there had been a lot of Spanish issuance, which meant that when cash became tight there were lots of investors, especially in France and Germany, trying to sell those assets but finding it almost impossible to find demand for them.

"When the ECB made its decision, everybody thought it would give more liquidity to those assets, which would then tighten more than others that had been more actively traded," says Maurel. "Also, Spanish deals were trading a little higher than others, and it's more likely for a spread at 200 to come back to 150 than a spread of 50 to come back to flat."

Andrew Porter, HSBC's global head of covered bonds, says that Santander had remained open to issuing covered bonds, monitoring the market throughout its 11-month period of closure. "They had picked up that secondary conditions had been improving and that there had been increasing confidence among investors beyond the French and German sectors, which had already seen some activity this year. As a result Santander offered to update investors before the ECB announcement. They had been reading the market and preparing to move."

Where the ECB's announcement did help was in the extent of the deal's success, say the leads: Maurel and Porter concede that knowledge of the purchase plan helped both in terms of the level achieved and the extent of oversubscription: the order book closed at EUR3.2 billion after less than two hours.

"But they could have got the trade done and done well anyway," says Porter. "The ECB didn't make a deal-or-no-deal difference; it just helped the execution."

The success of this deal - especially in terms of its wide international distribution (see investor profile box) - is likely to have caused every relevant issuer in Spain to reassess the cedulas market. La Caixa issued a deal later in the month, but Maurel cautions against expecting the kind of issuance levels that the market used to take for granted, with a new deal a week for a period of several months. "The funding need is lower than before as many issuers managed to fund themselves through government-guaranteed deals. Issuers still want to protect their overcollateralisation levels in covered bonds, which makes issuance less likely as there has been less mortgage lending in Spain this year. I wouldn't be surprised to see more issuance from good-quality names in the market this year but they are in no hurry."

The wider implications of the deal are significant, especially in light of the strong international distribution. The Spanish market has been very active in government-guaranteed issuance during the global liquidity squeeze, but in most cases a very large part of the demand was domestic. According to Maurel, this was beginning to raise questions as to the future of an international bid for Spanish paper without some improvement in take-up.

A non-domestic placement of 75% was higher than expected, and while Maurel says this was probably helped by the ECB announcement, Porter adds that Santander's ongoing dialogue with investors made them comfortable with the issuer's mortgage book and its status as a credit generally. "La Caixa achieved an international bid of 60%, which of course is a very positive thing for that issuer, but Santander's extra 15% demonstrates the work it has been doing with the core institutional investor base."

Issuer: Banco Santander

Date of issue: May 11, 2009

Bookrunners: DZ Bank, HSBC, Santander, Societe Generale

Size of deal: EUR1.5 billion

Maturity: May 27, 2014

Coupon: 3.875%

Re-offer price: 99.626%

Re-offer spread: Mid-swaps + 120bp

Rating: Aaa/AAA

Investor profile

Germany and Austria accounted for the bulk of the transaction, with 34%. Spain took 25%, the UK and Ireland 17%, France 14%, the Nordic and Benelux countries 3% apiece, Italy 2% and residual distribution of 2% went elsewhere. In terms of investor type, banks were predominant with a participation of 53%. Fund managers took 38%, insurance companies 6%, central banks 1% and others 2%.

"There was a natural bid for this asset," says Maurel at HSBC. "It's the same rating as government-guaranteed issuance but has a wider spread and longer maturity, making it a fantastic alternative to the Spanish three-year government bond - which has a spread of 18bp over mid-swaps - for some investors."

While the leads are anxious not to downplay Banco Santander's attractions as a well-regarded visitor to the debt capital markets in its own right, they acknowledge the role of the ECB in getting this deal away. Investors who were always going to buy into the deal are likely to have been influenced by the ECB's purchase programme to do so in larger size, says HSBC's Porter. "It's a question of their outlook on spreads becoming more positive, particularly in Germany, where there has been a large volume of net redemptions in the Pfandbrief market."

He adds: "Cash levels have been consistently rising over this year and those investors who have been supporting the very limited levels of covered bond issuance have had a lot of money to put to work."

Porter sees those institutional accounts deciding to put more cash in the market than they would have done before the announcement as its single biggest effect so far.

The second largest impact has been felt from increased participation in the covered bond market by bank treasury investors, a group that had been far more cautious before the ECB's intervention.

"That end of the market in covered bonds used to be 50% of deal size but has been much lower year to date," says Porter. "They have become more willing to get involved since the announcement by the ECB."

Note: While the ECB had been clear about the scale of its cash support for the European covered bond market, the specifics of its purchasing commitment had not been revealed when Credit went to press.

[BX] credit says... While the timing of this deal denied Santander the chance to show its mettle as an issuer without the ECB's implicit support, both the extent of investor participation and the pricing level achieved demonstrate continued support for a market that had been in the doldrums for almost a year. The extremely enthusiastic support from non-domestic purchasers is impressive, and will reassure many Spanish issuers about their ability to reach an international audience.