Yesterday, Santander decided not to call its 6.25% bond. This decision was widely watched by the bond market for a very simple reason: it was the very first bond for which the call was not an obvious decision. We try to answer a few basic questions raised by this decision.
- Was the non-call a surprise?
Yes and no.
Why no? Early January, the bond was trading at 95 and the market was split: only half of the people we talked to at the time believed the bond would be called. This was reflected in the price. As recently as yesterday, the views were still balanced (including at Axiom where a very unscientific poll led to a 50-50 result.)
Why yes? Because the communication by Santander was odd, to say the least. They had always said that call decisions would be made on an economic basis and the supervisors are generally expecting banks to refinance such bonds (especially for Santander which does not have ample capital.) However, last week they issued a bond at 499bps, 42bps inside the backend of the Santander 6.25. Some traders viewed this as a confirmation that Santander would call and the bond even briefly traded at 100. Moreover, as the call date notice period expired without a call, Santander took the time to issue a press release to explain that the market had wrongly read the day count in the bond prospectus and that the deadline was a few days later…Why bother doing that if you do not plan to call anyway?