European banks are doing something they rarely do with their riskiest debt: thinking long-term. Banco Santander and NatWest Group are among the lenders selling record amounts of Additional Tier 1 bonds with 10-year call dates, a move designed to lock in relatively low borrowing costs for a full decade.
The strategy is straightforward. Issue perpetual hybrid bonds now while investor appetite is strong, push the first call option out to 10 years instead of the more typical five or six, and secure a longer runway of predictable capital costs.
What’s actually happening in the AT1 market
NatWest Group issued a $1 billion reset perpetual subordinated contingent convertible AT1 bond with a 10-year call and an 8.125% coupon.
Banco Santander, meanwhile, has been even busier. The Spanish bank conducted a 1.5 billion euro perpetual non-call six transaction that pulled in over 10 billion euros in orders. That’s a roughly 6.7x oversubscription.
Santander has also announced a tender offer for up to $850 million of an outstanding AT1 tranche, effectively swapping older, potentially more expensive capital for fresh issuances at better terms.
AT1 bonds sit at the bottom of the bank capital structure. They’re perpetual instruments, meaning they technically never mature, with scheduled call options that give the issuer the right to redeem them at specific dates. If a bank’s capital ratio falls below a certain threshold, these bonds can be written down or converted to equity. That risk is why they pay higher yields than senior debt.
Why banks are stretching call dates to 10 years
The call rate on first call dates has historically hovered around 95%. But Santander learned in 2019 what happens when a bank chooses not to call an AT1 bond on its first call date. Investors were, to put it diplomatically, displeased. The decision rattled confidence and raised questions about whether other banks might follow suit, briefly disrupting the market’s comfortable assumption that AT1 calls were a given.
By issuing bonds with 10-year calls instead of five, banks eliminate the near-term refinancing risk entirely and lock in current spreads for twice as long.
What this means for investors
For bond investors, AT1 bonds with 10-year calls offer attractive coupons, NatWest’s 8.125% being a case in point, but they come with a longer period of uncertainty before the issuer is likely to redeem.
When Santander attracts over 10 billion euros in orders for a 1.5 billion euro deal, it signals that institutional buyers are hungry for the yield premium AT1s offer over other debt instruments, even with extended timelines.
Santander’s simultaneous tender offer for older AT1 debt and issuance of new bonds illustrates the core approach: retire legacy capital, replace it with fresh issuance, and extend the timeline before refinancing is required again.
Non-call events, while rare, can trigger outsized market reactions, as the 2019 Santander episode demonstrated. With longer call dates, the window for potential economic disruption is simply wider, and the 8% coupon needs to adequately compensate for that exposure over a full decade rather than just five years.