On February 12, Banco Santander did not call a perpetual instrument that many in the market had expected it not to call. The price of those bonds briefly dipped from their pre-announcement level of 98.7 cents to just below 97c but had recovered to 98.367c by the following day.
On paper, this doesn’t look like much of a story. But this is the subordinated debt market, which does not react well to things not panning out exactly as expected. Particularly when it comes to calling bonds. Subordinated debt instruments are priced to their first call date: it is taken as read that they will then be called.
In 2008, when Deutsche Bank announced that it would not call a €1 billion lower tier-2 issue because this would be more expensive that extending it, the entire European iTraxx subordinated index widened out by more than 10 basis points. In 2016, both Standard Chartered and Commerzbank decided against calling legacy hybrid tier-1 instruments, and StanChart’s notes immediately fell by 14 points to 83c.
Expectation
The first sign that the Santander situation might not be going entirely by the book came when the Spanish bank launched a new RegS dollar 7.5%