Barclays serves as template for KBC CoCo

Thu Jan 10, 2013 10:42am EST

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LONDON, Jan 10 (IFR) - KBC Bank will seek to emulate Barclays' hugely successful contingent convertible (CoCo) bond of last year, as it prepares to embark on a roadshow for a US dollar benchmark deal that closely mirrors the UK bank's permanent write-down bond.

The Belgian lender has yet to publicly detail the structure, although one lead manager said it would include a permanent write-down feature once the bank's Common Equity Tier 1 falls below 7% - the same trigger level used in the Barclays CoCo. It will be led by KBC, Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley, JP Morgan and Credit Suisse.

A 10-year non-call five subordinated Reg S Tier 2 benchmark is expected, with KBC previously announcing last year that it planned to launch EUR750m of non-dilutive CoCos in the first quarter of this year.

"The structure will be very close to the Barclays CoCo," said the banker. "The strong demand for the Barclays deal showed there is appetite for these types of issues."

Barclays attracted USD17bn of demand for its BBB- rated Tier 2 10-year bullet last November and only paid a coupon of 7.625%, despite it being the most aggressive deal yet of its kind. The CoCo has since performed well, narrowing from its initial pricing of Treasuries plus 604bp to 550bp over, according to Tradeweb.

Bankers said this would likely be the main pricing comparable, alongside UBS's USD2bn August 2022s 7.625% CoCo.

The roadshow will start in Asia next week, largely targeting the private banks in Hong Kong and Singapore that poured into CoCos last year to build momentum behind the order book. Another lead on the deal said that institutional investors would also be a key target.

The main divergence from the Barclays deal will be the absence of US investors - who took 52% of that transaction.

"We will be spending the roadshow explaining KBC's story to investors and the structure, and getting them comfortable with the buffer above the 7% trigger," said the lead.

KBC's fully loaded Basel III common equity stood at 11.7% at the end of September. Another banker on the deal highlighted that KBC's EUR1.25bn rights issue last December should also encourage investors looking at its capital position.

The first banker on the deal said KBC opted for a permanent write-down feature over an equity conversion structure for two main reasons. Firstly, the success of Barclays deal, and secondly, the difficulties encountered around existing shareholder approval for convertible structures.

KBC's choice of structure could vindicate Barclays, which met with some scepticism at the time despite its success, due to the lack of regulatory clarity over bank capital standards.

Global regulators have not explicitly endorsed contingent capital but have asked that all bank capital instruments be able to absorb losses at the point of non-viability or before any taxpayer money is injected into a bank.

Regulators are expected to clarify capital requirements in the publication of CRD4 in the first half of this year. In the meantime, KBC joins Barclays in taking a view on the final shape of the rules by not including contractual point of non-viability language in the structure, instead relying on a statutory approach.

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