BBVA makes U-turn on bond call policy


By Aimee Donnellan

LONDON, Oct 11 (IFR) - BBVA shifted its stance of callingsubordinated bonds at the earliest opportunity, as Spain'ssecond largest bank struggles to fund at sustainable levels inthe wholesale markets.

When it announced a liability management exercise onThursday, BBVA also said that future call decisions would takeinto consideration the economic impact of early redemption,regulatory requirements and market conditions.

This is the second bank in days to announce a new strategylinked to liability management just weeks before an instrument'scall date.

On Wednesday, Austria's Raiffeisen Bank International (RBI)gave investors in a Tier 2 bond a similar warning.

The BBVA subordinated bond buy-back is targeting 17securities worth up to EUR2.8bn-equivalent through aSantander-style liability management exercise, less than twoweeks before its October 2017 bond is scheduled to be called.

A spokesman for the bank explained that it had shifted itsstrategy on calling bonds to adapt to a new economic world.

However, there was speculation in the market that BBVA istrying to appease shareholders that are putting pressure on theborrower to renege on its bond-calling policy.

"BBVA is trying to balance the needs of bond investors andshareholders," said a banker.

"Bond investors want the notes to be called and shareholdersare pushing for the bank to hold onto the cash while it ishaving difficulty accessing the senior market."

BBVA called three bonds earlier this year, which one bankersaid gave hope to investors that the outstanding bonds would becalled on their relevant dates.

However, a deteriorating funding situation for BBVA hasmeant that shareholders are putting pressure on the issuer notto call the bonds, he added.

Two weeks ago, BBVA struggled to sell a EUR1bn two-yearsenior unsecured bond at mid-swaps plus 325bp, attracting a mereEUR1.1bn of orders.


BBVA could send ripples through the bond market with its newpolicy on bond-calling, as lead managers BBVA, Morgan Stanleyand UBS say the offer, under an unmodified Dutch auctionprocess, is very similar to a controversial Santander exercisethat came before it.

Prior to Santander's buy-back of subordinated and hybriddebt at the end of August, a Dutch auction had never been usedfor bank capital.

Unmodified Dutch auctions involve bondholders telling anissuer what bonds they own and where they want to sell thosebonds back to the issuer, rather than the issuer itself settinga minimum buy-back price.

BBVA is offering investors a price guide with minimumlevels, which is being seen in the market as a less aggressiveapproach than Santander's, which gave none, leaving bondholdersscrambling to calculate the relative value of their bonds.

One of the lead managers explained that, while Santander'saggressive approach is still fresh in the minds of many, BBVA istrying to avoid such a negative outcome.

"The issuer is trying to avoid bidding on the bonds lowerthan where they are currently traded and upsetting investors inthe way that Santander did," he said.

BBVA is targeting 17 outstanding Lower Tier 2s in a varietyof currencies, including euros, yen and sterling.

The exercise is being divided into two. The first "basket"of securities involves medium to near-term notes that arepublicly traded in the market with call dates ranging fromOctober 2012 to 2017.

Minimum prices have been set on the second basket of bonds,which includes a number of private placements that are currentlynot traded in the public market.

The longest maturity involved is October 22 2035 for ayen-denominated instrument, while the shortest paper, in euros,matures on October 16 2015.

The issuer has a maximum spend of EUR2.8bn for a mixture ofbullet and callable Lower Tier 2 bonds and the maximum discountfor the offer is 35%.

Two of the targeted bonds have a consent clause along withthe tender because the terms and conditions prohibit notes frombeing bought back. Bankers say that while this is unusual it isnot unprecedented in liability management circles.

Institutional investors who wish to participate have fromOctober 11 to 15.00 GMT on October 26 to take advantage of theoffer.

The result of the buy-back will be published October 29.

"I think a successful outcome would be for investors to say'that's not what I wanted but it's fair'," said a banker.

(Reporting by Aimee Donnellan; editing by Helene Durand, AlexChambers & Philip Wright)

((aimee.donnellan@thomsonreuters.com)(0207 369 7675)(ReutersMessaging:aimee.donnellan.thomsonreuters.com@thomsonreuters.net))