Draft Spanish SNP law emerges after Santander deal

Spain could take over the initiative from the European Commission and introduce national senior non-preferred (SNP) legislation ahead of the summer break, with the introduction of such debt featuring in a broader draft law that surfaced in mid-May, and following the issuance of a contractual version by Santander.

As French banks were preparing to open the new senior non-preferred asset class in December on the basis of national law, the European Commission on 23 November proposed amendments to the BRRD to create a common EU instrument ranking between senior debt and Tier 2 to meet TLAC/MREL requirements, with the aim of finalising legislation around the middle of this year. Crédit Agricole successfully opened the market, but the Commission set a cut-off date of end-2016 for the creation of national laws to avoid a proliferation of different products.

This left G-SIB Santander facing a 1 January 2019 TLAC deadline to raise some EUR22bn-EUR26bn of senior non-preferred debt out of its main Spanish entity without a legislative framework to work with. It therefore said in January that it was considering various interim approaches for issuing TLAC-eligible debt.

The Spanish national champion hit the market on 26 January with Eu1.5bn of 1.375% five year “second ranking senior” notes. The deal was priced at 120bp over mid-swaps on the back of some EUR4.25bn of demand, following initial price thoughts of the 135bp area and guidance of 120bp-125bp. A $2.5bn (EUR2.23bn) three-tranche deal followed on 4 April.

Rated Baa2/BBB+/A- versus Santander’s A3/A-/A- ratings, the notes are contractually subordinated to other senior unsecured obligations and have automatic alignment of their terms and conditions to future statutory subordination once a law is adopted.

“They are basically contractually subordinated senior notes, effectively trying to mimic what a senior non-preferred for French banks in the absence of a law in Spain,” said a DCM banker. “However, while they clearly had investors who understood the security and bought the deals, I understand certain investors were not convinced that the legal mechanism works, particularly what happens if it gets disqualified.”

Yet with mid-year approaching, progress on the Commission’s initiative has been slow and its target is not expected to be hit. A banker suggested the cut-off date for national laws creating senior non-preferred debt could be relaxed, allowing member states to move ahead as necessary.

“There have been various texts that have indicated a compromise might be possible at the EU level,” he said. “But they may also push back the cut-off date.

“The question for national legislators is then whether they feel sufficiently confident that will happen. My understanding is that laws have been drafted to be ready if and when they can push the button.”

Various countries are said to be in such a position but not under as much pressure as Spain to move ahead, with their national institutions having lower needs or not facing pressing targets.

According to Doncho Donchev, capital solutions, DCM, Crédit Agricole CIB, the Spanish draft law introduces a new category of senior non-preferred debt issued by banks and other financial institutions, and stipulates that the ranking in the insolvency waterfall in terms of priority is explicitly after other “ordinary unsecured creditors” of the financial institution in question. It also reflects three criteria matching the Commission proposal, but only in respect of Art. 108 BRRD2:

1. Minimum initial contractual maturity equal to or superior to one year;

2. No derivative features; and

3. Include a (contractual) clause stating that they have a lower insolvency priority compared to the rest of “ordinary credits”

However, it does not specify “derivative features”, for example, nor deal with requirements for TLAC/MREL eligibility specified in the Commission’s proposed amendments to the CRR, such as direct issuance, waiver of set-off rights, or bail-in acknowledgement.

“They have not been very bold,” said Donchev. “They have effectively done a copy and paste from the European law (Art. 108 BRRD2), just introducing a senior non-preferred category within the senior category.

“They don’t deal with any of the other requirements in the draft CRR 2 — I guess that’s also because it’s not required as part of the European legislation (BRRD2).”

The provisions have been included in a broader piece of legislation primarily dealing with mortgages that observers say could be voted on before the summer.

“If this happens, Santander’s second ranking senior notes should be converted into senior non-preferred notes, and therefore become directly comparable to French senior non-preferred notes,” added Donchev.