Santander in £750m UK HoldCo AT1 first

Santander UK sold an inaugural public £750m (Eu1.03bn) AT1 at the group holding company level at the end of May in conjunction with a tender offer for a variety of its operating company’s capital instruments, in a move an official at the issuer described as ground-breaking for the UK group.

The liability management exercise included three sterling and one dollar instruments and some £308m equivalent of outstandings were accepted when the tender closed in early June. Meanwhile, Santander UK Group Holdings plc had on 28 May issued its £750m perpetual non-call seven permanent write-down 7%, CET1 trigger securities after a roadshow.

Leads Bank of America Merrill Lynch, Barclays, Morgan Stanley, Santander and UBS attracted over £5bn of demand for the trade and were able to tighten pricing from initial price thoughts of 7.5%-7.75% to a coupon of 7.375%. On top of the £5bn book, parent Santander SA had pre-committed to buy £100m of the issue, which was rated Ba2/B+/BB+.

The capital transaction is the first public issuance out of the group’s UK holding company.

“Going forward, for Santander UK all of our capital instruments will be issued from our holding company,” said Tom Ranger, director of funding and collateral management at Santander UK (pictured). “It’s important that as a UK bank with a holding company, which is our single point of entry, we start to optimise as much as possible our capital structure and therefore start issuing new debt out of the holding company and at the same time try to minimise any existing inefficient capital instruments we have out of the operating company.

“The other rationale was that in the UK the direction of travel for the leverage ratio has moved to a point in excess of 4% and, although that’s still a few years away, a very important part of that journey is to issue AT1. If you look at our leverage ratio, which we are very happy with, it was 3.7% at the end of Q1 and this issuance gets us well on the way to being around the 4% number.”

Ranger said that the transaction also put down an important and successful marker for the UK arm of Santander.

“The overriding takeaway that we have is that investors and the market really seem to take comfort from our business model,” he said. “For the last two years we’ve had many discussions internally about the fact that we have to do a permanent write-down security because we don’t have public equity out there, so to some extent this was a pretty ground-breaking transaction.

“It is a high trigger, fully-loaded, permanent write-down instrument – we did a lot of research and a lot of fine tuning on this – so it was really pleasing when you look at the pricing that we were not penalised for the structure and that people looked through and saw the underlying strength of our balance sheet. It wasn’t an issue of what happens when you get to the triggers, which is incredibly unlikely, but more a question of accepting the way we’re run and thus the remoteness of getting close to the triggers.”

The choice of the non-call seven structure was based on “resounding” investor feedback after meetings with over 140 investors and also Santander having issued two non-call five year AT1 transactions last year, he added, with the choice of currency reflecting Santander UK’s balance sheet.

Ranger acknowledged the issuer had been somewhat fortunate in its timing, issuing before volatility resurfaced, and with the sterling market being somewhat insulated from the Eurozone’s problems.

“I guess the very interesting thing, which goes against everything you learnt at school, is that in such volatile markets, the less volatile product is the higher risk product,” he added. “To a certain extent, I would probably have more faith in issuing a hybrid capital instrument today than a triple-A covered bond, which makes no sense from everything I learnt, but that is the life we’re in.”