Calling a bottom in Spain

August 24, 2009

Is the worst over for Spanish mortgage defaults? That’s one way to interpret Santander’s offer to buy back up to 16.5 billion euros of its outstanding asset-backed debt.

The securities are trading below par – more than 40 percent in some cases before today’s announcement – allowing the bank to reduce debt by buying them back. Cash-rich banks such as HSBC have launched similar buybacks this year to profit from the ABS market dislocation, but it’s the first time a Spanish bank has launched such a large public buyback.

Santander has offered to pay slightly more than market prices, suggesting it thinks there is some money to be made by buying these bonds at beaten-up prices and waiting for the mortgages to pay off.

The buyback could also be a sign Santander believes the freeze in the European securitized debt markets is thawing.

European ABS prices have rallied sharply in recent weeks, in part because traders at investment banks have started bidding for the debt again. Some of the more beaten-up Santander MBS have gained by as much as 15 percentage points since June, according to one investor.

Santander is rumoured to have bought back ABS earlier on in the credit crisis through private one-off trades. Perhaps it wants to get hold of as much as it can now in case spreads keep rallying further.

There may also be some political capital in a large public buyback of this kind. It gives a sign of strength to the market, and shows the bank supporting the secondary market for its bonds. That may win Santander some kudos with investors when it comes to issue MBS in future.

What’s not clear is whether investors will bite and sell. With unemployment and mortgage arrears rising in Spain, some may take the chance to get out while they can, even if it means taking some pain. Some hedge funds have piled into the more depressed bonds issued by Santander’s UCI unit, and will likely make a quick profit by selling.

But other investors may decide that if the bonds are good enough for Santander, which in theory knows the assets better than anyone, then they are good enough for them.

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