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Capital Markets

Covered bonds: Santander polishes its reputation

Covered bond issuers are increasingly clear about the merits of solid execution, as Santander's and DexMa's latest deals show.

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.

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