UPDATE 1-Barclays brings CoCo litmus test for UK banks
By Aimee Donnellan
LONDON, Nov 5 (IFR) - Barclays Bank is embarking on a global roadshow to present its contingent capital (CoCo) structure to investors in what could be the first issue of its kind from a UK borrower.
Barclays will meet investors in the U.S. over the course of three days, with bankers on the deal hopeful that institutional investors there will drive momentum.
Barclays will also meet accounts in Switzerland and Hong Kong as well as throughout Europe.
If Barclays is successful, bankers expect that the door will open quickly to allow other banks to bolster their balance sheets with a form of debt capital that can be quickly converted into equity when the bank comes under stress.
Global regulators have said CoCos would not count as core capital and failed to lay out clear standards for them, leaving it up to national regulators to determine how far banks could use them.
Swiss banks were specifically asked by their regulator to raise contingent capital, and have made much of the running in developing CoCos.
Credit Suisse targeted mainly retail investors and private banks, and received a strong reception for a USD2bn 30-year non-call 5.5 Tier 2 transaction in February 2011 that was more than 10 times subscribed and priced at 7.875%.
More recently, UBS went a step further and sold the first bank capital instrument with permanent write-down features to US institutional investors.
The USD2bn 10 non-call Tier 2 offering priced at 7.625% or 598bp over US Treasuries, and tightened by nearly 150bp in the secondary market, according to Tradeweb.
"The fact that UBS managed to sell more than half of the deal to US institutional accounts is testament to the product and has paved the way for other issuers like Barclays," said a banker.
The roadshow will commence Tuesday, November 6, with Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley acting as joint bookrunners and Barclays' investment banking arm acting as global co-ordinating bookrunner and structuring advisor.
Barclays will be the first clear test for CoCos out of the UK because Lloyds' deal, when it swapped GBP7.5bn of existing subordinated bonds for new CoCos in 2009, was part of its distressed recapitalisation.
Because of regulatory uncertainty, most European banks have focused on raising subordinated debt rather than try to break new ground, but last month the UK financial industry regulator seemed to pave the way for CoCo supply from the country's banks.
And Barclays' finance director Chris Lucas hinted last week that a transaction was coming when he said in a conference call on Wednesday that the bank had made considerable progress with the FSA regarding the capital value attributed to contingent capital.
"Now that we have greater clarity we will be engaging with investors in the next few weeks to solicit their views," he said on Wednesday.
Lucas said the deal would not count as Core Tier 1 but would be a Tier 2 until it converts. "We have spent considerable time with regulators developing an instrument that would work."
UK banks will have to hold large amount of loss-absorbing debt under proposals made by the Independent Commission on Banking and an October Financial Services draft.
On top of the minimum Core Tier 1 requirements and capital conservation buffer, they will need added layers of bail-inable debt in order to prevent tax-payers from having to inject money.
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