Banco Santander Totta is offering holders of three series of its residential mortgage backed securities the opportunity to swap them for an existing covered bond it is holding, with a higher price on offer than in an earlier cash tender for the RMBS.

The Portuguese bank said yesterday (Wednesday) that it will offer up to Eu600m nominal of the January 2014 covered bond for the HipoTotta RMBS, which have Eu1.2bn nominal outstanding. The covered bond was issued last year and retained by Totta.

“The exchange offer is being made as part of BST’s management of its balance sheet and capital structure,” said the bank in a filing.

A funding official at the bank told The Covered Bond Report that the idea behind the exchange is to give investors another opportunity to sell the RMBS they are holding, and to have a lower risk product in the form of the covered bond.

The offer will take the form of an unmodified Dutch auction with minimum exchange prices for the RMBS of between 75% and 85% of par, which represent an implied nominal premium approximately five points above clearing prices for the RMBS in the previous tender offer in March. The covered bond price will be 98.5% of par, to account for its off-market coupon of three month Euribor plus 250bp.

Banco Santander, Bank of America Merrill Lynch and UBS are dealer managers. The exchange will end on 8 October, with the results announced the next day.

“Given that Santander Totta already holds significant portions of these deals, we assume that it will retain and repo the purchased RMBS securities,” said RBS analysts. “As the offered covered bond seems to be retained by the issuer currently, the exchange would be ‘OC neutral’ for covered bond holders as no further bonds are issued.

“From a liquidity perspective the effect should be negative for Banco Santander Totta as it would need to refinance the difference to the higher haircut for these RMBS compared to the retained covered bonds. However, this is compensated by a positive effect on its capital as it buys back these bonds markedly below par.”

They said that in light of outstanding volumes of publicly placed senior RMBS tranches (and assuming that they have not yet been bought back) and outstanding volumes of covered bonds that may have been retained, similar exercises could make sense for Banco Espírito Santo, BPI and BCP.

Bankers away from Totta’s exchange offer suggested that it could offer other benefits in addition to profit generation, such as allowing collateral to be released. One said that the take-up rate on the exchange offer will be interesting given that several accounts in the issuer’s March 2012 exercise had the bonds marked at a relatively high level on their books and were therefore unwilling to tender or exchange at a discount.

“Given that these notes are securitised and overcollateralised they were quite happy to hold on to them rather than accept any up-front loss,” he said.