What's going on?

The eurozone�s largest bank, Spain�s Santander, blindsided investors this week when it declined to buy back some of its debt.

What does this mean?

Following the last financial crisis, several European banks began to issue a new kind of bond: �contingent convertibles�, a.k.a. CoCos. While normal bonds get paid back after a set period, CoCos have no such end date attached. Instead, banks can periodically buy the bonds back from investors � and, in certain situations, convert them into stock. CoCos are a pretty risky bet all round, and so investors typically expect issuers to buy them back at the earliest opportunity.


After Santander issued a lovely fresh bunch of CoCos last week, investors assumed the bank would use the money raised to buy back an older $1.7 billion worth. So they were stunned when the bank neglected to do so, saying on Tuesday it would be cheaper to leave the existing CoCos outstanding than �call� them.

Why should I care?

For markets: Daredevil bonds are shaken� and, yes, stirred.

Santander clearly believes that its reputation is strong enough to withstand reneging on its �gentlemen�s agreement� with investors. And the fact that it may well be right led those investors to sell off other banks� CoCos in case they follow Santander�s example. While bonds are generally considered a safer option than stocks, the $340 billion market for risky European debt suddenly looks even riskier � and investors will likely demand correspondingly higher interest rates in future. Over in China, meanwhile, regulators are looking into companies� ability to finance traditional bonds, after defaults tripled in 2018.

Zooming out: Business as usual in the rest of the bond world.

Tobacco giant Altria sold $11.5 billion worth of (normal) bonds to investors on Wednesday, with the cash helping to pay for its forthcoming acquisition of a 35% stake in e-cigarette company Juul. Despite some concerns about the size of the market, company bonds clearly remain much in demand � Altria was deluged with $50 billion of orders.