Sabadell to eliminate excess TSB debt with negative net issuance

The bank will reduce its financing costs with fewer issues and a better rating. Some maturities will be left uncovered to adjust the cushion.

Sabadell will be a much less frequent debt issuer from now on. The sale of its British subsidiary, TSB, has changed the landscape. It has many more bonds than it needs and a plan to increase profitability, measured as ROTE, to 16% by 2027, which will greatly benefit from a lower financing cost.

The bank is convinced it will be able to reduce its debt payments on the market. This is one of the key points of its three-year strategic plan, 2025-2027 . There are two key factors to achieving this: negative net issuance and the improved rating it has achieved in recent years , the bank explained.

Sabadell will now sell less debt on the market than its maturity date to drain the total outstanding amount. These are transactions that are reaching maturity and will not be refinanced because it no longer has the need to do so. This is the portion that was intended to cover TSB's loss-absorbing debt (MREL) buffer , which no longer makes sense now that the sale of the British subsidiary to Santander has been agreed upon.

The buyer will take with him all of TSB's issues, but Sabadell had some in the group that were also intended to cover its subsidiary . Added to this is the bank's own excess over MREL requirements. It's a very generous cushion, and it wants to reduce it.

The authorities are asking Sabadell for a debt shield capable of absorbing losses of 25.3% of its risk-weighted assets. It currently holds 29% , and the sale of TSB will raise this to 32.5%.

Its intention is to gradually reduce this gap until 2027. Its current objective is to achieve exactly what they are asking for, and that means cutting 7.2 percentage points from MREL in the two and a half years remaining in its strategic plan.

The debt shortage will reduce the total interest outlay, but at the same time will increase the market's appetite for Sabadell's bonds , allowing it to reduce the prices it pays. This isn't its only advantage. The bank also has the rating upgrades it has received from the agencies . From being close to junk status at the beginning of 2024, it now even has one of its ratings in the good range (A-, from S&P).

It could soon achieve another similar rating, as Fitch has placed Sabadell's rating on positive watch for upgrade and is now at BBB+, so the next step is A-. The only one left behind among the big three is Moody's, which continues to give it a passing grade.

The rating is one of the key components of financing costs. The higher the rating, the lower the cost of issuing the debt. "The financing plan will generate significant savings," Sabadell anticipates in the document defining its strategy for 2027. "There will be fewer and cheaper issues," emphasizes its financial director, Sergio Palavecino.

By instrument, the bank's provisions focus on maintaining full buffers of contingent convertible bonds (CoCos or AT1) and subordinated debt (Tier 2). Maturing debt will only be replenished if there is a deficit above the regulatory threshold , which in this case is 1.92% for AT1 and 2.56% for Tier 2.

Senior and non-preferred debt issuances will be most affected by the goal of reducing the MREL buffer. This is the area where the most maturities will remain uncovered , but the bank has committed to ensuring that some of its operations will be green or social.

Mortgage bonds will only be used if the market is very favorable and there are advantages to doing so. Sabadell says it will be "an opportunistic issuer in euros." The final addition will be significant risk transfer (SRT) securitizations. There will be more, and they will be used to increase profits by transferring unwanted assets and improving capital.