By Caleb Gibbons, CFA, FRM,– Originally at IBankCoin

Barings Bank was sold for £1 to ING back in 1995, but the comp is close one has to admit.

SANTANDER Banco Popular
stephaniemonot / Pixabay

Spanish regulators red carded Banco Popular, selling them to Banco Santander for €1 (US$1.13). The mechanics of a resolution mechanism provide us with a potential road map for the future. It appears subordinated bond investors were not charging enough for the tail risk being assumed.

Santander press release:

“07/06/2017

Banco Santander today announces that it has acquired Banco Popular. The acquisition takes place following an auction conducted by the Single Resolution Board and FROB in which Santander was selected as the successful bidder, paying a notional consideration of €1. As part of the transaction Santander will complete a rights issue for a total amount of €7 billion. This will cover the capital and provisions required to strengthen Popular’s balance sheet. Existing shareholders will be given preferential subscription rights. The rights issue is underwritten.”

The focus of the popular press (pun intended) has focused on the equity component of the capital structure, but the real story has been on the debt components, both senior and subordinated.

Along with the common equity, as one would expect with an outright sale at €1, addition tier 1 (AT1) bonds have been totally cancelled (traded high $50’s $ price to effectively zero). Tier 2 Popular subordinated bonds have been voided through conversion to equity @ €1. Senior debt is protected in this scenario with the 2’s of 2020 trading up $12 to $102.

Look for other challenged issuers’ AT1 bonds to “adjust” to this news (read: not higher in price) over time, although initial reactions appear to be muted.

Follow me on Twitter @firehorsecaper JCG

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