Santander Brasil Preps for Basel III with Hybrid Plans

Santander Brasil plans to swap BRL6bn ($2.67bn) of equity for hybrid capital and subordinated debt, reducing its cost of capital as Basel III rules come into effect in Brazil. The bank will pay a BRL6bn dividend, it says, and offer shareholders an equivalent amount in a hybrid instrument that complies with Basel III rules for additional tier 1 capital (AT1), and a tier 2 bond. The AT1 note will be a perpetual NC5 instrument that will convert into equity if the bank’s capital ratio falls below a pre-defined trigger or the bank becomes non-viable. Coupons are likely to be 9%-10%, and Santander will have full discretion over the coupon payments, which will not accumulate if they are not made. The 10NC5 tier 2 bond will also carry equity conversion risk, flipping if the regulator deems the bank non-viable or if the bank’s common equity capital breaches 4.5% of risk-weighted assets. That trigger makes the bond similar to contingent capital (Coco) instruments. “It will be interesting to see how the investor base looks at it, whether it’s a true Coco-type instrument, or whether the trigger is so low that it’s part of non-viability loss absorption anyway,” Stanley Louie, head of the new products group at Citi, tells LatinFinance. The tier 2 is likely to pay 7.5% to 9.0%, Santander estimates. The new instruments offer another glimpse at Basel III-compliant structures in Brazil though, given the bank’s ownership, the AT1 note offers tougher terms to investors than it would otherwise, to comply with European rules. The non-equity capital will be offered only to existing shareholders, in proportion to their ownership. Parent company Santander Group has agreed to participate and to buy any capital that is not subscribed by others. The bank estimates the operation will increase ROE by 40bp. The bank hopes to execute the capital optimization plan, which is subject to shareholder and regulatory approval, in the next 4-5 months. Santander Brasil has a common equity tier 1 capital ra