Santander Brasil goes tight on Basel III hybrid
January 15, 2014
The bank’s new capital instruments are set to come at a lower cost than it expected
Santander Brasil’s offer to shareholders to subscribe hybrid bonds or subordinated debt has come at a lower yield than it signaled when it flagged the capital optimization deal in September.
The Baa2/BBB/BBB rated Brazilian lender is offering a 7.375% tier one perpetual instrument and a 6% 10 year non-call five subordinated tier two bond.
When Santander first indicated its intentions last year, it said it would likely offer a coupon of 9% to 10% on the tier one, and 7.5% to 9% on the tier two.
Only existing shareholders may subscribe to the new instruments, which the bank is selling as part of a strategy to reduce its cost of capital. Santander Brasil will distribute BRL6bn ($2.5bn) of equity — equal to BRL1.59 per unit — to shareholders, which they may use to subscribe to the new issue.
Santander Group has said it will subscribe any instruments offered that are note picked up by other shareholders.
As indicated in September, the instruments offer a rare glimpse at subordinated securities under Basel III format in Brazil.
Coupons on the perpetual instrument are discretionary and non-cumulative. The security will convert into stock if Santander Brasil’s common equity tier one capital drops below 5.125% of risk weighted assets.
The tier two will convert to shares if the bank’s equity falls further, to 4.5% of risk weighted assets.
S&P rates the tier one BB and the tier two, BB+. It assigns intermediate equity content to the tier one and minimal equity content to the tier two.
The bank reported a Basel II tier one capital ratio of 19.9% at the end of the third quarter. The bank estimates the operation will increase return on equity by 40bp.
Shareholders have until January 24 to register for the sale. LF