The increased numbers of European banks and other originators making tender offers to buy back their structured finance issues primarily reflect originators taking advantage of opportunities to optimize their funding profiles and capital structure.
Tender offers often appear to be motivated by originators taking opportunistic advantage of the apparent differential between current distressed secondary market prices – which are usually lower than the tender offer price – and the implied value that originators see, indicated by the expected credit performance of the related securities. The tender offer allows a degree of deleverage for the originator and the potential ability to book a profit.
Stuart Jennings, managing director at Fitch Ratings, said that the public tender offers do not affect ratings. However, where there is a substantial offer, Fitch plans to conduct ongoing surveillance.
“It’s a fairly positive trend, that originators are standing behind transactions at all, and the fact that take-up is low could mean that investors are seeing more value in securitization,” Jennings said.
Banco Santander’s tender offer is the largest to date in Europe and consists of various RMBS, consumer ABS and SME CDO securities. The results of Santander’s first tender offer of Spanish RMBS saw a turnout of €609 million ($886 million).
“On the face of it, this may seem a low turnout when compared to the overall amount that was outstanding (€16.5 billion), but we suspect that Santander may have already purchased a number of bonds in the secondary market during the past year and therefore the listed amount outstanding is not necessarily held by investors,” said Dipesh Mehta, assistant vice president in Barclays Capital’s securitization research team. “For this reason, it is hard to evaluate the results of the tender, but we do make a few observations.”
From the 27 securities offered for tender, investors tendered (at some level) for 20 of these securities, and seven had no take-up. “Surprisingly, investors felt no need to tender their bonds for these seven securities, of which four are on review for possible downgrade by at least one rating agency,” Mehta said.
The low take-up of the tender offer might be a result of the rally seen in the secondary prices for these securities recently. Upon announcement of the tender, prices for a number of these securities rallied, alongside a general tightening in ABS secondary spreads, which might have left investors better suited to trading in the secondary market rather than tendering back to Santander.
Jennings explained that the low take-up in the tender could show that there is more value in holding on to the bond or that the prices are too low. Jennings said there have been other cases in tender offers where the take-up rate has been even lower.
The low take-up could also signal that investors may be more comfortable with the credit risks of these bonds.
The low acceptance rate could also mean that the seller overhang on the structured finance market has come to an end in Spain, which is a market sector that is exposed to relatively higher fundamental downside than other European jurisdictions.
“The need to sell and liquidate ABS at any cost is clearly over as technical pressure has abated,” Unicredit analysts said. “This unfortunately applies only to the senior universe. We doubt that participation would have been as low if Spanish mezzanine paper would have been tendered as well.”
SNS Bank also announced a tender offer by way of a modified Dutch auction for a select number of bonds across the Hermes RMBS transactions. SNS said it would purchase up to €1 billion from RMBS bonds issued via Hermes 8 to 13.
“Unlike the Santander tender offer that was offered as a fixed-price auction, this tender offer is in line with all previous European RMBS tender offers by way of a modified Dutch auction with a specified range of prices,” said Mehta, who added that gauging how attractive these prices are compared with current secondary levels is difficult given the illiquidity of the market.
The tender offer included all outstanding publicly placed tranches across the capital structure from Hermes 8, 9, 10, 11, 12 and 13, except for the E tranche and the A1 tranche from Hermes 13. The tender offer also excludes the earlier Hermes transactions, 2, 5, 6 and 7.
The results of the SNS bank offer saw €556.8 million purchased from the €1 billion on offer. Of the 23 tranches offered for tender, 10 tranches were not taken up by investors – all non-triple-A. Of the triple-A that were purchased, they were all at the minimum of the tender offer range apart from Hermes 8 A, which was closer to the maximum.
Mehta said that with over 55% participation in the tender, investors may have found the prices on offer, particularly at the triple-A level, fairly attractive, which contrasts to the low take-up in the Santander tender offer.
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