A Banco Santander Totta offer to exchange three RMBS for a covered bond fell flat, with a participation rate disclosed yesterday (Tuesday) said to be the lowest ever for a FIG liability management exercise, although a banker on the deal played down the influence of it having been a covered bond that investors were offered.

According to the results of the exchange Eu6.55m of the original principal amount of three Hipototta RMBS bonds were tendered, corresponding to an amortised principal amount of Eu3.0457m. The Portuguese issuer will swap these for an existing, retained, January 2014 covered bond, with RBS analysts putting the nominal amount to be delivered at Eu2.3m.

The issuer had said it would offer up to Eu600m nominal of the covered bond for the RMBS, of which Eu1.2bn nominal was outstanding when the exercise was launched at the end of September. The RMBS had already been targeted in a cash tender offer in March, with the exchange exercise tabling a higher price than that on the cash offer.

No Hipo-1 Class A notes were tendered as part of the ABS-covered swap, while around 0.265% of the free float of Hipo-4 Class A notes was tendered (corresponding to an outstanding amortised amount of Eu1.43m) and around 0.243% of the free float of Hipo-5 Class A notes (Eu1.62m outstanding).

The final exchange prices were not announced yesterday, but the minimum prices were set at 75% for Hipo-1 Class A, 78% for Hipo-4 Class A, and 75% for Hipo-5 Class A2. These represent an implied nominal premium approximately five points above clearing prices for the RMBS in the previous tender offer. The covered bond price will be 98.5% of par, which RBS analysts said translates into a discount margin of around 380bp.

Banco Santander, Bank of America Merrill Lynch and UBS were joint dealer managers.

Market participants away from the deal said the results were very poor. A liability management banker said that the outcome was worse than expected, and that they amounted to the lowest participation rate ever for a FIG liability management exercise, although he noted that the RMBS had been already targeted.

The deal was poorly structured, he said, with a covered bond the wrong output instrument for the RMBS holders.

“The offer was going to fail from the start,” he said, “and it didn’t get any momentum.”

Other liability management bankers said that the use of an unmodified Dutch auction rather than a fixed price offer was a major contributing factor to the failure of the deal, with the former making it much more difficult for investors to appraise a trade, especially in the case of a more complex exchange such as Totta’s.

A banker on the deal acknowledged the take-up was low, but suggested that it should be seen in the context of an already low weighted average hit rate of around 15% for tender offers.

“The deal was really interesting, and we got a lot of intelligence,” he said.

That a covered bond was the output note had little to do with the relatively low take-up, he said, and the outcome of Totta’s exercise does not shut the door on covered bond-ABS exchanges.

“If 80% of the accounts had said we can’t take covered bonds then yes, it would shut the door, but we got nowhere near that,” he said.

However, RBS analysts said that the result of Totta’s exchange is likely to put off other Portuguese issuers, for whom a similar exercise would have been an option. They said that the results were disappointing, and said that this could be due to the RMBS having already been targeted in March, investors not wanting to book losses and submitting offers at prices unappealing to the issuer, and/or RMBS investors not being allowed to include covered bonds in their portfolio.

The banker on the deal said that most accounts were able to take covered bonds. Some were not able to participate because they could not book any more losses this year after having taken part in other tender offers, he said, and could have taken part if the exercise had been carried out at a different time.

The liquidity of the output note was a determining factor, according to the banker, with a covered bond not seen as offering greater liquidity than the notes already held. He said that some accounts expressed an interest in a cash tender for the RMBS notes, saying that they wished they had taken the first such offer.