Barclays explores new CoCo frontier
* High-trigger issue seen as potential blueprint
* Bank's comfortable capital cushion could allay investor nervousness
* Timing follows upbeat talk from BoE and FSA
By Helene Durand
LONDON, Nov 9 (IFR) - Barclays is poised to sell the first high-trigger total loss contingent capital issue, in a deal which could become a blueprint for other banks' attempts to bolster balance sheets.
One of the main hurdles to success will be to convince bond investors to buy a security where they could lose everything even as Barclays remains a going concern, as the notes will be automatically written down to zero if the bank's Common Equity Tier 1 ratio falls below 7% (post CRD4).
The structure is considered by many market participants to be even more aggressive than the low-trigger contingent capital transactions sold by UBS earlier this year.
The 7% trigger on Barclay's CoCos is 2% higher than UBS's August trade, although it is 2% below the 9% SIFI (systemically important financial institution) buffer below which Barclays is required to restrict discretionary payments such as dividends and discretionary compensation.
"From a bondholder perspective, this sucks: bondholders and shareholders interests are completely misaligned," said one credit investor.
"To have the permanent write-down at 7% is pretty unfavourable. Unlike the UBS trade, where if the bank got to 5% it would be declared non-viable and restructured with some impact on shareholders, here, you could lose everything and shareholders would actually benefit."
While Credit Suisse has sold high-trigger contingent capital notes before, investors in those bonds see their holdings converted into shares if the bank hits the 7% trigger, thereby giving them a potential upside if the bank recovers.
Barclays had Core Tier 1 capital of 11.2% of its risk-weighted assets at the end of September, and estimates that number will move to 10.4% on a full Basel III basis at the end of next year, giving potential CoCo investors an apparently comfortable cushion.
"We would not rule out participating as we have bought permanent write-down structures before," said a portfolio manager. "But we will want to know why they're doing it. The pricing will also be key."
The global investor roadshow, via lead managers Barclays, Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, wraps up next Tuesday with an expected USD2bn 10-year bullet issue (rated BBB-/BBB- by S&P and Fitch) likely to be pitched with a 7% yield handle.
The roadshow encompasses all regions and investor types so the leads can target Asian and Swiss private bank investors if they can't get institutions onboard at the right price.
The transaction follows a long period of negotiations between Barclays and the UK's Financial Services Authority. Both the FSA and the Bank of England's Financial Policy Committee have in recent months come out in favour of contingent capital .
So far, only Swiss banks have been required to issue CoCos - under the so-called Swiss finish - although Lloyds did force a low-trigger CoCo (which converts to equity) on subordinated investors in a debt exchange as part of its 2009 distressed restructuring.
The Barclays CoCo will count as Tier 2 capital under Pillar 1, the minimum capital requirements set by global and European regulators, but the bank said that it will also count towards the additional Pillar 2 capital cushion local regulators can insist on.
"There has been a lot of debate around contingent capital. And while it wasn't endorsed by global regulators as an asset-class under Pillar 1, the fact that the UK regulator is endorsing it under Pillar 2 means that other regulators might take a second look, and we might see a real market spring up," said a hybrid banker.
There are limited comparables in terms of pricing. Barclays has a 2020 dollar Tier 2 that was quoted around 4.4% last week, and a new non-CoCo Tier 2 would be expected to come in the low 5% area. The rumoured 7% handle, therefore, would offer a juicy pick-up for the more aggressive structure.
When UBS did its low-trigger CoCo, the difference between its old Tier 2 paper and the new Tier 2 Coco was around 250bp, although this has now shrunk to less than 100bp. The USD2bn 10-year bullet CoCo was quoted with a yield of 6.25% on Friday.
Expectations are that Barclays would have to pay a bigger spread between old and new given its proposed deal has a high-trigger, although unlike the Swiss contingent capital transactions, the Barclays deal does not include contractual point of non-viability which investors charge more for. One banker estimated the differential could be anything between 150bp and 300bp.
Other relative value points include Lloyds CoCos that trade with a yield of around 7%. (Reporting by Helene Durand, Additional reporting by Aimee Donnellan, Steve Slater, Editing by Alex Chambers, Matthew Davies)