There will be a special place in markets hell reserved for Banco Santander SA if it doesn’t redeem a particular 1.5 billion euro ($1.7 billion) bond in March.

The bond has been a sore point for investors ever since the Spanish bank failed to confirm that it would definitely issue a call for it at face value. That would be a mightily unpopular move given that honoring the redemption is accepted practice for this type of paper, known as perpetual Additional Tier 1s (AT1s or CoCos for short). The last day the bank can trigger this call is on Tuesday.

AT1s offer a high coupon – 6.25 percent in this case – in exchange for greater risks. They can be written down and converted into shares if a bank’s capital ratio falls below a certain level. A non-call would be a first in Europe for what’s still a relatively young asset class.

It would be especially surprising if Santander chose to disappoint bondholders after its separate issuance of a dollar-denominated $1.2 billion AT1 last week, with a 7.5 percent coupon. As Bloomberg News wrote, the sale was timed strangely, with many Asia investors away on the lunar holiday and the book closed before U.S. trading hours.

That means many of the takers will have been in Europe. Indeed, many may well be owners of the old euro 6.25 percent perpetual. Now this might all be coincidental, but one theory in the market is that European investors have bought into the new dollar AT1 in the hope that their participation will mean the controversial euro note is actually redeemed by Santander.

The dollar AT1 wasn’t particularly attractive in its own right. The coupon was lower than one might expect for this type of issue, and the bond has performed badly in the after-market, its yield widening by 45 basis points.

But maybe European investors believe that after supporting this issue, Santander will do right by them by saying it will redeem the euro AT1 on Tuesday. The bondholders would certainly be pretty unhappy if that doesn’t happen, as the euro CoCo would lose the 6.25 percent coupon and switch to the five-year swap rate plus 541 basis points, which at prevailing rates is about 5.55 percent. The drop in income would persist for potentially a long time. So these are a nervous couple of days for holders, especially if they’ve bought the dollar AT1 as well – giving them twice the exposure to the riskiest type of Santander debt.

If, as expected, Santander, does the honorable thing with the euro CoCo, there may a broader lesson to draw here. It doesn’t augur well for the future of the euro-denominated CoCo market if the stronger banks, such as Santander, are bristling at the implicit restrictions on how they redeem their euro AT1s and are moving to issue in dollars instead – especially to European investors. It hardly encourages American or Asian banks to diversify away from the much more liquid dollar market.

Euro-denominated AT1s could end up as just a backwater for smaller, more domestically-focused institutions. The only hope is that it is a managed decline.

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To contact the editor responsible for this story: James Boxell at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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