Santander has decided to postpone the repurchase of a contingent convertible bond (‘CoCo’) of 1,000 million euros, whose first optional redemption window is scheduled for September 29, waiting for a moment in which it makes economic sense, according to Market sources have confirmed to Europa Press.

The ‘CoCos’ are convertible contingent bonds issued by banks, are perpetual in nature and count as additional Tier 1 capital, which is why they are also known as AT1 issues.

These bonds include a first optional window of liquidity to which entities usually resort, although they can also postpone their liquidation, since they are perpetual. To do this, once the first is rejected, liquidity windows are opened every three months.

In addition, these bonds –which are placed with institutional investors– can be converted into ordinary shares of the entity under certain circumstances, such as that the CET1 capital ratio of an entity falls to a certain level.

In this case, Santander has decided that, for the moment, it will not repurchase this issue of 1,000 million, postponing the amortization until favorable conditions are met. From the bank they have assured Europa Press that the operation will be carried out when it makes “economic sense”.

The reason behind this decision, according to market sources, is the current high cost of issuing ‘CoCos’, whose yields are above 10%. This situation stems from the sale of Credit Suisse to UBS, which entailed a change in the order of priority in absorbing losses between AT1 bondholders and shareholders.

Specifically, shareholders are usually the first to be affected in the event of an entity’s resolution, although in the case of the Swiss bank, the holders of ‘CoCos’ were the first to suffer losses in the value of their bonds, while the shareholders maintained some value for their shares.

In this way, in the event that Santander decided to amortize this issue of ‘CoCos’ now, whose coupon is 5.25%, it would have to return to the market to place a new issue to replace it –since banking regulations require maintaining certain levels of AT1 assets– but with an interest payment higher than the current one.

As Bloomberg points out, which has advanced the news this Thursday, another bank, Z├╝rcher Kantonalbank, has also decided to postpone the redemption of an AT1 bond. In addition, the analysts consulted by this means consider that Santander’s decision will not impact the ‘CoCos’ market, since the entities are generally complying with the return of these bonds.

It should be remembered that in 2019 Santander became the first entity to postpone the amortization of a ‘CoCo’ of 1,500 million euros that it had issued in 2014, since at that time it did not make sense and it was more expensive to repurchase it than to continue paying interest to the bond holders. However, in 2020 he finally decided to buy back the bond.