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Santander’s debt buy-back not necessarily a flop

September 9, 2009

Santander’s attempt to buy back 16.5 billion euros of asset-backed debt looks, at first glance like a bit of a flop: in the end investors only sold about 600 million euros of bonds by face value to the bank.

However, the result is not that surprising, for several reasons.

First, 16.5 billion euros was always a long shot. We don’t really know how much of the debt Santander had previously acquired in one-off trades in the secondary market, making it hard to say how much it could have bought back this time.

The tender offer, announced in July, grabbed a lot of headlines, but in fact Spanish, Dutch and other banks – Santander included – have anecdotally been quietly buying back their asset-backed debt ever since the market collapsed at the start of the credit crisis. Moreover, accounting changes introduced in Europe last year will have meant that bank investors who held the bonds won’t have had to mark the debt to market, reducing their need to sell.

Second, probably more relevant, the bonds had rallied in the secondary market after Santander’s announcement to match the levels the bank was offering in the buyback. That, combined with a recent market rally, meant that in many cases the debt was even trading above Santander’s offer price, according to an analyst.

Investors may also have taken Santander’s actions as a show of confidence in the assets backing the debt, and decided to stick it out and hope to get their money back rather than take a loss now. They may be feeling a bit more warm and fuzzy about asset-backed debt given the market’s recent rally and better liquidity as more dealers have started making markets in the debt.

The next move is up to Santander. It could keep quietly buying the debt back in the secondary market, or come out with another tender. Next time, it will have to pay up a bit more to grab investors’ attention.

Things would get a bit more exciting if it offered to buy back some of the hairier subordinated debt next time, rather than the senior-ranking bonds as it did this time. Those bonds are more heavily exposed to the Spanish economy and trading at far steeper discounts to par. It would be interesting to know what Santander reckons they are really worth.

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