Santander's offer to junior debt holders under fire

Santander's offer to buy back junior debt from bondholders has drawn criticism from analysts who accused the Spanish bank of trying to lock in a profit at the expense of investors.

Analysts at Societe General said Santander's offer to exchange a selection of lower Tier 2 bonds worth €6.8bn (£5.8bn) for more senior debt was not "compelling" and inexplicable given the lender's stated financial strength, the Telegraph reports.

"Santander's credit position remains one of the strongest in our credit universe, in spite of Spanish sovereign worries, and broader macroeconomic concerns in the Eurozone.

"As such, we see no benefit for investors of being put in a more senior position at a bank where bail-in risk appears to be remote today. However, there may be other bad news embedded in this exercise as we see no point to it," said Hank Calenti at Societe Generale.

It estimates the replacement of the old subordinated debt with new senior unsecured bonds would allow Santander to recognise a €640m gain in Core Tier 1 capital, or about 10% of the capital shortfall identified at the bank in last month's European Banking Authority stress tests.

Another analyst said the gain could be booked by the bank as a profit in its fourth quarter results, according to the Telegraph.

"The rationale for the exchange offer is to effectively manage the group's outstanding liabilities, taking into consideration prevailing market conditions," said a spokesman for Santander.

Bondholders have until next Wednesday to tender their holdings. Those that do not accept the offer risk being left with bonds that will be far less actively traded if a substantial proportion of investors accept the bank's terms.

Separately, Fitch downgraded the subordinated debt of Northern Rock Asset Management, the "bad bank" of the collapsed lender, and Bradford & Bingley after the launch of a tender offer for the bonds. The rating agency warned the offer was "tantamount to distressed debt exchanges".