Barclays heads to Asia with around USD4.5bn in orders

Tue Nov 12, 2013 5:55pm EST

Bankers are hoping the new CoCo trade - the first UK offering of its kind in the US market - will herald the start of a thriving US dollar investor base for European bank capital.

Barclays itself is running the book, along with joint leads Citi, Deutsche Bank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo. None of them would comment Tuesday.

But buyside sources said the juicy initial price thoughts, in the low 8% range, had brought in about USD4.5bn of orders by the time the New York book-building period was closing.

"That's going to give this deal a pretty good boost for book-building in Asia and Europe, so I'm guessing they'll end up pulling in guidance," said one investor.

The deal is the first Alternative Tier 1 structure from the UK to test broad US demand in the SEC-registered public bond market for perpetual securities that convert to equity, which they will in this case if the bank's common equity falls below 7.00% of risk-weighted assets on a quarterly basis.

Some in the market are expecting Barclays to price somewhere between 7.5% and 8.00% - and that the deal will be around USD1bn-USD2bn in size.

Bankers away from the transaction expect Barclays will price and size it to be a resounding success, which could mean keeping an 8% handle or being conservative on size.

In addition, the bank needs to keep the US market open for itself; it told investors it wants to issue GBP2bn of AT1 securities by June next year.

NEXT BIG THING?

European capital securities are being sought after by US investors as the next big spread-compression trade, now that capital is being shored up and Europe is no longer in crisis.

The products are especially alluring given that US bank spreads have tightened so much that they trade inside of US investment-grade industrials for the first time since the crisis.

There are also some investors jumping into the deal to turn a short-term profit.

"I am buying this deal because there's good demand and I can make money out of it," said one investor. "Many people are looking at this as at worst, you are getting an 8% payout on something that could end up being stock in Barclays."

Another investor said: "This has a lot of broad appeal with the equity piece being a factor. It's easy for arbitrageurs to isolate risk."

And while the bonds are rated BB+/B-, many investors see the deal as an investment-grade bank paying 8.00%.

UNUSUAL STRUCTURE

The structure has some quirks that make it difficult to compare it to other European CoCo deals done in the 144a/Reg S markets.

Barclays has two outstanding Tier 2 CoCos in dollars, the 7.625% bullet 2022s (yielding 7.00%) and its 7.75% 10-non-call fives (yielding 6.15%).

One buyside source said that many were looking at the 7.75% 10NC5s and building up pricing from there to compensate for it being a perpetual bond, rather than one with a final maturity.

Other wrinkles are that it has a discretionary coupon payment feature rather than the "must pay" on the 10NC5s as well as a fully-loaded, rather than a transitional, trigger.

The difference between fully loaded and transitional triggers comes in how Tier 1 is calculated.

Moreover, unlike US Tier 1 perpetual preferreds, the deal doesn't have a dividend stopper.

Such stoppers ensure that the issuer stops paying dividends on its equity if it decides to stop - or is made to stop - paying the coupons on the bonds.

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