Many readers who have read any of my articles on Banco Santander (SAN) realize that I think quite highly of the bank and their ability to navigate through the current global (and specifically European) financial issues. I will not re-hash my reasons for my recommendation for the bank (you can read them here, here, and here), but I felt a recent action by the bank shows how this global banking powerhouse has, yet again, taken advantage of the current turmoil strengthen the bank.
On August 22, 2012, the bank announced that it was (potentially) buying back some of their subordinated and hybrid debt through an unmodified dutch tender offer.
An unmodified dutch tender offer is where owners of their securities submit prices they would be willing to tender their debt to the firm and the firm (in this case, Banco Santander) decides whether or not they will but back the debt.
The bank has invited for tender securities which total principal amounts to €7.200.950.000, in relation to the Securities denominated in Euros, or to £3.372.750.000, in relation to the Securities denominated in Sterling. The invitation includes five Tier 1, two Upper Tier 2 and 14 Lower Tier 2 notes. By way of guidance, the offerors intend to accept offers up to a total maximum of €2,000,000,000.
Here is the release with the list of bonds.
From the release:
The rationale for the Invitation is to effectively manage the Group's outstanding liabilities and to strengthen its balance sheet. The Offers are also designed to provide liquidity to the securityholders.
As the majority of the securities are trading below par, it will effectively raise BASEL III capital (difference between carrying value and tender value). It will also help the bank understand who its holders are and how they are valuing the debt.
The way this bank is going about this is novel. Using an unmodified dutch tender offer means investors have to submit prices at which they will be willing to sell their debt and the company is under no obligation to buy the debt. No obligation to pay out a single cent. This allows Banco Santander to determine if the prices are right for them to engage in the tender. Normally, the bank would announce a tender with prices and priorities (which bonds they were most inclined to buy back) and investors would determine if they wanted to take part in the tender.
Last year Santander did this to investors which in some ways forces an investors hand as if they don't tender and the majority of holders do, they are left with illiquid bonds. This ticked off some investors, so you can imagine that this new approach has not settled in well with many investors.
Bottom Line: Banco Santander, in launching this dutch tender, has shown yet again that they are focused on their capital position and will deal with all parties from a position of strength. The bank is dealing with both fundamental (loans, deposits, real-estate etc) and capital issues simultaneously and from a position of strength. If I were a bondholder (of the subordinate or hybrid issues), I would be both ticked off at, and impressed with, the tenacity of the tender.
Additional disclosure: Long SANPrE as well. This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.