Market watchers are wondering whether or not a reverse takeover of the treasury operation at Santander has taken place. When the Spanish bank swallowed up UK mortgage bank Abbey, many feared that Abbey's highly regarded treasury operation would lose credibility in the eyes of investors. But Santander has brought to market a breakthrough trade with a new-found regard for price transparency and performance. In September it printed €4 billion in two tranches – one €2.5 billion 10-year at 3 basis points over mid-swaps, the other a €1.5 billion five-year at plus 9bp – and left a little spread on the table for investors [see graph].
The Spanish bank has garnered an extremely poor reputation with investors and underwriters for a short-sighted execution policy for its benchmarks. For years, bankers have effectively paid for the honour of being awarded a mandate.
In the early days of the cedulas market Santander was the only benchmark name, so it could easily persuade intermediaries to provide unrealistically tight pricing.
Clearly the feebleness of underwriters, who were more concerned about losing market share than getting fees for conducting this business, should not be understated.
But it was Santander that ended up paying the ultimate price. New issuance performance on its bonds was poor. They usually widened 2bp upon breaking syndicate. Santander was even in danger of trading wider than its own subsidiary Banesto, an occurrence that is virtually unheard of.
Experienced observers will remember that Santander has promised to change its spots before, but failed to do so. This time, however, the deal's pricing was transparent, with no market talk of a backstop bid provided by the underwriters, ABN Amro, Calyon, Citigroup and SCH.
Further proof of long-standing issuers' new found sense of responsibility was also provided by DexMa's A1 billion 10-year. DexMa also had a reputation for aggressive opportunistic transactions – although not in the same league as Santander – but has recently moved away from that policy.
The 10-year's order book was built around sensible price talk of Euribor plus 1bp-2bp and the deal was placed at plus 2bp. The leads – ABN Amro, SG and UBS – would still have struggled to make much money, however, the all-in was 2.5bp
The covered bond market is growing rapidly. New issuers such as Finland's Sampo and ABN Amro are always going to ensure their deal's perform from the outset. With some new kids on the block, it is proving essential that established players take the right approach to maintaining investors' cooperation.