That Santander managed to raise €2bn of five year Cédulas funding this week was great news. But investors would have been better off waiting until the deal became free to trade. Then they could have bought it 30 cents cheaper.
Let’s hope for Santander’s sake that those buyers have short memories. Otherwise they may decide not to bother showing up for its next trade. Why, they might well ask, would I buy something today when I know it is going to be cheaper tomorrow?
This is pertinent because of the borrower’s decision to take as much off the table as possible and issue the largest bank deal of the year so far. Unfortunately, that strategy was not supported by demand.
The €2bn trade managed to attract an ostensibly strong enough order book of €2.6bn. That would have been fine for an issuer in Europe’s core. However, the more credit-intensive buyers of higher yielding peripheral debt markets expect to have their orders cut back by at least half, if not more.
When investors in Santander’s latest deal found out that they were to get nearly a full allocation, they promptly returned their unwanted bonds back to the leads — pushing the price down and widening the spread to mid-swaps by around 7bp from the 195bp reoffer level.
The error of Santander’s ways is made all the more conspicuous by the fact that, until now, primary Cédulas issuance this year had been accompanied by spread tightening. The five Cédulas borrowers that tapped the market before Santander were able to price through their own curves, and still their deals performed in the secondary market.
But the largest of those five deals was only half the size of Santander’s.
Until Santander, market makers had been forced to cover their short positions in the expectation that the new issue would re-price the secondary curve tighter. In other words, the price discovery value of a new issue had outweighed its impact on the regular rules of supply and demand.
Santander’s deal has queered the pitch. Although the market is still in decent shape, Spanish issuers looking to follow the national champion will have to wait until all the surplus liquidity with which it has flooded the market has been mopped up.
That may take several weeks, if BBVA’s record is anything to go by. Back in November 2012, BBVA made exactly the same mistake when it issued a similar sized five year trade. Thankfully it redeemed itself this year with a €1bn 10 year.
Let’s hope Santander can follow BBVA and put this bad deal down to experience. Above all, it needs to behave like the A3 Cédulas issuer that it is, not the triple-A it once was.