UPDATE 2-Barclays' contingent capital bond finds strong support

Wed Nov 14, 2012 8:38am EST

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* Ambitious structure vindicated by strong demand

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By Helene Durand

LONDON, Nov 14 (IFR) - Demand for the Barclays' contingent capital issue, the first high-trigger total loss bond launched by a bank, has reached USD12.5bn with the order book dominated by Asian investors.

Orders from Asia have reached USD10bn and lead managers Barclays, Citi, Credit Suisse, Deutsche Bank and Morgan Stanley collected USD2.5bn of orders from U.S. accounts overnight, sources close to the deal said. Asian books are now closed.

Price talk remains in the mid-to-high 7% range for the 10-year Tier 2 contingent capital bond, which is expected to be rated BBB- by S&P and Fitch.

Under the terms of the deal, the notes will be automatically written down to zero if the bank's Common Equity Tier 1 ratio falls below 7% (post CRD4).

This will be the first test of investor appetite for a bond where buyers could potentially lose everything while the bank remains a going concern, thereby reversing the traditional creditor hierarchy.

"Barclays has proceeded in a very clever way by marketing this deal in every nook and cranny of the globe," said a debt capital markets banker.

"The deal is also SEC registered which means they can sell into the U.S. and appeal to a much broader investor base. The transaction has been set up to succeed and minimise execution risk. I can't think of a hotter market in the last four-years in which to price this kind of deal."

Demand from U.S. investors could likely grow further given how little is on offer in the primary market with comparably high yields. On Tuesday, Wells Fargo & Co set a new record for the lowest ever coupon on a bank capital security when it priced a USD600m perpetual non-call five-year preferred at just 5.125%.

Market sources expect that the Barclays trade will be sized at USD2bn and price inside the initial price guidance, but are uncertain whether the bookrunners will be able to set final terms below the 7% level.

"Rabobank and Credit Suisse set the bar for these new-style capital instruments pricing USD2bn issues, which UBS, for example emulated," said the banker. "Anything less could be perceived, rightly or wrongly, as not having attracted the same level of interest and therefore not as successful. There is no question in my mind that with guidance at 7%, this was always going to be a home-run for the issuer."

Not all investors have taken a favourable view on the trade, however, and some saw the guidance as aggressive for the structure. "Mid to high 7% does not 100% compensate you for the risk," said a portfolio manager.

"You could potentially get written-down on this while the bank's hybrid Tier 1 securities are not affected even though they are supposed to be more junior. However, it doesn't surprise me to see the strong demand and I would expect private banks in Asia to participate as on a standalone basis, the coupon looks attractive."

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