BBVA makes U-turn on bond call policy

By Aimee Donnellan

LONDON, Oct 11 (IFR) - BBVA shifted its stance of calling subordinated bonds at the earliest opportunity, as Spain's second largest bank struggles to fund at sustainable levels in the wholesale markets.

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

This is the second bank in days to announce a new strategy linked to liability management just weeks before an instrument's call 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 17 securities worth up to EUR2.8bn-equivalent through a Santander-style liability management exercise, less than two weeks before its October 2017 bond is scheduled to be called.

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

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

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

"Bond investors want the notes to be called and shareholders are pushing for the bank to hold onto the cash while it is having difficulty accessing the senior market."

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

However, a deteriorating funding situation for BBVA has meant that shareholders are putting pressure on the issuer not to call the bonds, he added.

Two weeks ago, BBVA struggled to sell a EUR1bn two-year senior unsecured bond at mid-swaps plus 325bp, attracting a mere EUR1.1bn of orders.


BBVA could send ripples through the bond market with its new policy on bond-calling, as lead managers BBVA, Morgan Stanley and UBS say the offer, under an unmodified Dutch auction process, is very similar to a controversial Santander exercise that came before it.

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

Unmodified Dutch auctions involve bondholders telling an issuer what bonds they own and where they want to sell those bonds back to the issuer, rather than the issuer itself setting a minimum buy-back price.

BBVA is offering investors a price guide with minimum levels, which is being seen in the market as a less aggressive approach than Santander's, which gave none, leaving bondholders scrambling to calculate the relative value of their bonds.

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

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

BBVA is targeting 17 outstanding Lower Tier 2s in a variety of 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 are publicly traded in the market with call dates ranging from October 2012 to 2017.

Minimum prices have been set on the second basket of bonds, which includes a number of private placements that are currently not traded in the public market.

The longest maturity involved is October 22 2035 for a yen-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 of bullet and callable Lower Tier 2 bonds and the maximum discount for the offer is 35%.

Two of the targeted bonds have a consent clause along with the tender because the terms and conditions prohibit notes from being bought back. Bankers say that while this is unusual it is not unprecedented in liability management circles.

Institutional investors who wish to participate have from October 11 to 15.00 GMT on October 26 to take advantage of the offer.

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, Alex Chambers & Philip Wright)

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