Earlier this month I explained how Barclays booked a £1.1 billion profit at the expense of future interest costs by repurchasing libilities trading at a discount to par, and how RBS did the same to the tune of over £3 billion.
Now it looks as though Santander are doing the same. Six weeks ago Santander offered to swap a nominal €9.1 billion of securities for new issues, and today they are offering to buy back €16.5 bn of bonds, which the bank says will improve its capital structure and strengthen the balance sheet of Grupo Santander.
Discounts on par values this time range between 4.5 and 39 per cent, meaning the bank will book extraordinary profits on any repurchased bonds. Some of the retired bonds formed part of the Tier 2 capital structure of the bank, but the profits will go to the bottom line and boost Tier 1 capital, at the expense of future interest costs. Does it make the bank a stronger bank if there is more senior debt and less subordinated? Not really but tell that to the regulators and accountants.