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Spain’s Sabadell Skips AT1 Call in First Due to Surging Yields (BBG)
· Lender cites costs in current market as it shuns replacement
· Exercising calls at first opportunity was standard practice
Spanish lender Banco de Sabadell SA broke with market convention and skipped the first call of a €400 million ($389 million) contingent convertible bond after the cost of replacing it with a new issue has surged this year.
“The decision has considered the replacement cost of AT1 instruments under current market conditions,” the bank said in a statement Friday.
Banks issue contingent convertible bonds, also known as additional tier 1 debt, to raise regulatory capital. Investors buy them under the expectation that they will be called at the first opportunity and replaced with a new issue, even though there is no obligation for borrowers to do so.
The surging cost of issuing debt this year amid central banks’ fight against inflation increased so-called extension risk in this risky type of bank debt.
“This decision doesn’t imply a change in our strategy or our approach to fixed income investors. It concerns the specific case of this issue,” Sabadell said in the emailed statement.