The resilience and resurgence of Banco Popular cédulas spreads during its woes and subsequent Santander rescue has been deemed proof “the system works”, with investors showing confidence in the product and the Spanish framework as new capital instruments were wiped out.

Before Banco Santander announced yesterday (Wednesday) morning that it had acquired Banco Popular Español, the latter had been heading for failure on the back of a severe capital shortfall, weakening solvency levels and significant challenges in facing non-performing assets. As concerns intensified between Thursday of last week and Tuesday, Popular’s market value fell by more than half.

In April, Popular’s covered bonds were downgraded from Aa2 to A2 by Moody’s and from AA to AA (low) by DBRS following downgrades of the issuer, prompting some selling and causing the bonds to underperform versus peripheral comparables. However, despite the long-held and widespread concerns over the viability of the bank, as Popular’s situation worsened its covered bonds widened relatively little compared to its senior and subordinated debt.

Between last Thursday and this Tuesday, Popular’s cédulas widened around 10bp across the curve, with its March 2022s, its last benchmark, trading at around 60bp at Tuesday’s close — although well inside the level of 88bp at which it was originally priced.

Bankers attributed this resilience partly to the influence of the ECB’s covered bond purchase programme, with the Eurosystem thought to have been picking up Popular’s bonds, having found its options in Spain limited amid a lack of new issuance, a relatively illiquid secondary market, and Spanish benchmark redemptions of some Eu24bn in the first half of 2017.

“I think it also shows that people trust the product and in the Spanish framework and regulators,” said a syndicate banker that worked on one of Popular’s most recent benchmark issues.

On Tuesday, the ECB determined that Popular was failing or likely to fail and duly informed the Single Resolution Board (SRB). On Wednesday, the SRB and the Spanish National Resolution Authority (FROB) entered the bank into resolution and allowed Santander to buy its rival for a notional bid of one euro.

After the announcement, Popular’s covered bonds rallied around 50bp across the curve to trade with a pick-up of around 10bp versus those of its new parent. The March 2022s were seen at 9bp, mid.

“Popular covered bonds will still trade somewhat wider than those of Santander given the different asset quality of the cover pools, assuming separate cover pools going forward,” said Franz Rudolf, head of financials credit research at UniCredit. “But the strong credit profile of Santander, to which Popular now belongs, is clearly the dominant spread driver going forward.”

Popular’s Additional Tier 1 bonds were, in contrast, wiped out.

“It shows the system works,” said a syndicate banker. “The covered bondholders benefit, the taxpayers don’t suffer, and the subordinated investors take the losses.

“It all worked as it should.”

Photo: Anual/Wikimedia Commons