Santander courts retail buyers for ABN bond

The Spanish bank Santander is dodging the panic in wholesale debt markets by launching a massive ¿5bn (£3.4bn) convertible bond issue to retail customers to fund the acquisition of ABN Amro.

Santander, which owns Abbey in the UK, began marketing the five-year bonds with an interest rate of 7.5 per cent in the first year and thereafter 2.75 percentage points above the Eurobank interbank rate. The notes automatically convert to shares after five years, with investors having conversion options once a year. Spain's biggest bank is, unusually, selling the notes to retail customers because the wholesale markets have seized up.

Rossitza Haritova, a convertible bond analyst at Nomura, told Bloomberg: "The wholesale market is not ready to take such a large issue. The size is unprecedented for an equity-linked product offer to retail investors."

The Spanish bank will sell the bonds to retail investors with at least ¿5,000 to invest through its branch network. Santander is, along with Fortis of Belgium, part of the Royal Bank of Scotland-led consortium battling with Barclays to buy ABN Amro. It is bidding about ¿71bn for the Dutch bank. Barclays and the consortium started the battle for ABN before the current credit crisis. Barclays' share-based offer now lags well behind the consortium's bid, leaving Barclays hoping that the consortium's offer trips up on regulatory approval or lack of funding in panicky markets.

The three banks have to raise funds to finance the deal, which Dutch regulators still have to approve, before the deadline for the decision of ABN shareholders during the first week in October. Santander is raising about ¿19bn. It has already issued ¿4bn in shares and agreed to sell ¿4bn of its property. Fortis still has to do a ¿13bn rights issue.