Santander’s choice not to release price guidance for its unmodified Dutch auction buyback is not exactly surprising. The markets have hardly been kind to the bank in recent years, so why should it be kind to the markets?
In any case, the bank’s aggressive approach towards investors is hardly a new phenomenon. Bondholders vented their anger last November at the stingy levels the bank offered on its sub to senior exchange, which it announced just after it had hinted that the bonds in question might not be called.
Its latest operation could be seen as an attempt to prevent a similar furore — in a sense, what investors don’t know can’t hurt them. But the winner’s curse of the unmodified Dutch auction (never knowing whether or not you’ve been ripped off if your bonds are accepted) may be hard for some to swallow, and the illiquid nature of the bonds being targeted effectively turns the tender into a game of blind man’s buff.
The unmodified Dutch auction technique has been used before in the ABS market, and also by Bankia in sub debt. But the majority of recent sub tenders have been modified Dutch auctions, and Santander seems cruel by comparison. Its treasury office is holding all the cards, but the investor relations department will be the one getting the hate mail.
But investors have come to expect such behaviour from the bank. After initial surprise — including one analyst who admired the size of the bank’s cojones — the reaction from most market participants has been “typical Santander”.
Moreover, investors must remember that they are not being forced to participate. Santander may provide them with a liquidity event ("may", because it is under no obligation to spend any money at all) in an illiquid market. For investors who want to get out at any price, the tender is a godsend. Those for whom price matters will be miffed, but buy-and-holds will be unaffected.
The terms are not polite, but neither are the markets. Santander saw its share price drop by more than 30% between March and May. It has rebounded over the past month, but it is likely to be hurt again when the Spanish real estate rumour mill starts churning again.
The bank is likely to suffer some losses on Spanish property lending, but it has a global business model and resilient revenue streams from abroad. It is not your average caja, so why does it trade like one?
The holders of the bonds being targeted all signed a contract, and what Santander is doing is within those terms. It may not win the bank many fans, but given its reputation, it is unlikely to lose as many as you might think.