The increased number of European banks and other originators making tender offers to buy back their structured finance issues primarily reflect these originators taking advantage of opportunities to optimize their funding profiles and capital structure, said Fitch Ratings in a report.
Banco Santander SA's this week's tender offer for 27 series of structured finance transactions, with a nominal value of €16.5 billion, was the latest in a growing trend. Santander's tender offer is the largest to date in Europe and consists of various RMBS, consumer ABS and SME CDO securities.
Because these liabilities are recorded at their amortized cost in these originators' consolidated financial statements, these firms can also report a profit on any tender offer once it is executed.
The agency noted that even though tender offers are made at a discount to their face value, this does not necessarily indicate credit problems with the securities concerned — in many instances, the discounted price may primarily reflect the continuing liquidity squeeze in the market and other investor concerns, such as extension risk.
"Several originators have conducted tender offers to buy back their securitization issues at discounted purchase prices. In many prior cases, the securities concerned performed within Fitch's rating expectations and had stable ratings," said Stuart Jennings, Fitch's structured finance risk officer for Europe. "Given that originators have the most direct access to information on underlying collateral performance, a tender offer could be construed as the originator demonstrating confidence in the credit quality of their transactions, given they are prepared to set a price to take those assets back onto their balance sheet.”
The growing trend of tender offers is not restricted to the structured finance market as Fitch has also seen banks tender for Tier 2 securities, often at sizeable discounts to nominal value.
"For the most part, recent tender offers have come from financial institutions that are not facing any considerable distress,” said Gerry Rawcliffe, group credit officer for financial institutions at Fitch. “They continue to have ready access to alternative funding sources, giving them the flexibility to be able to pursue tender offers in order to optimize their funding profile. However, tender offers can sometimes be indicative of a coercive debt exchange, where the tender offer is effectively forced upon investors by the need to re-structure funding to avoid default."