SAN Banco Santander SA

By Ben Dummett 

Banco Santander SA's plan to sell EUR7 billion ($7.85 billion) in stock to pay for its acquisition of Banco Popular Español SA highlights the real costs of rescuing its smaller, failing Spanish banking rival.

Winning the auction for Banco Popular was considerably cheaper. It required Santander to pay just EUR1 for the bank's equity.

Such a symbolic sum isn't unique for the acquisition of a distressed bank.

In 2012, Banco Bilbao Vizcaya Argentaria SA--which was invited but decided against bidding for Banco Popular--acquired troubled Spanish lender Unnim for EUR1 after the government nationalized it. When rogue trader Nick Leeson took down Barings Bank in 1995, Dutch Bank ING stepped in to buy its liabilities for GBP1.

So who gets that notional amount of EUR1 that Santander is paying?

Theory suggests it would be holders of Banco Popular's Tier 2 subordinated bonds.

In fact, it was the Spanish regulator that ended up with it, getting an electronic bank transfer of the money from Santander. As overseer of the auction, the regulator has first rights to any proceeds to help cover its costs. Not surprisingly, they quickly exceeded EUR1.

The process started last week after the European Central Bank decided that Banco Popular risked failure under the excessive burden of EUR37 billion in foreclosures and other nonperforming assets. Once that happened, Europe's Single Resolution Board, the group charged with protecting taxpayers from bailing out failing banks, stepped in and mandated the Spanish regulator, or FROB, to oversee an overnight of auction of Banco Popular.

As in most cases when a company faces a possible default, holders of the senior debt have the greatest chance of recouping their investment. Equity holders, meanwhile, are most likely to end up empty-handed. That scenario played out in the case of Banco Popular. The bank's senior debtholders didn't suffer any losses, while investors with lower ranked securities virtually were all wiped out.

Santander offered zero to holders of Banco Popular's common shares, which the day before the auction had a total value of EUR1.33 billion. It offered nothing to holders of the contingent convertible bonds, a hybrid debt security with equity characteristics. That, in theory at least, left holders of Banco Popular's more senior-ranked Tier 2 subordinated bonds to share the EUR1 after conversion of the securities into equity if the regulator didn't have first dips.

That said, even if the bondholders could lay claim to the one euro, the effort of dividing it up might make little sense.

Write to Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

June 14, 2017 02:48 ET (06:48 GMT)

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