Barclays unearths billions of euro AT1 demand

Thu Dec 5, 2013 12:03pm EST

LONDON, Dec 5 (IFR) - Barclays paved the way for other European banks looking to raise Additional Tier 1 in the single currency this week when it priced a heavily oversubscribed EUR1bn perpetual non-call seven-year issue.

Up until now, banks have relied heavily on the US dollar market to raise capital in this format, as it has offered the deepest pool of liquidity and question marks remained around how deep the demand would be in the euro market.

Banco Popular Espanol is the only issuer to have gone to euros, printing a EUR500m perpetual non-call five-year that attracted a book in excess of EUR1.5bn, although the issuer had to rely heavily on hedge funds to get the deal away.

For Barclays, however, the book on the trade reached EUR12bn, laying to rest any doubts about investor demand.

"We are seeing a gradual increase in the acceptance of this asset class across different investor types," said Daniel Fairclough, managing director, UK financial institutions, at Barclays.

"As is inevitable with any new product, this has taken time, but it's pleasing to see strong evidence of European real money involvement."

Fairclough added that being able to offer loss absorption through equity conversion had helped bring European investors to this market.

Barclays was keen to capitalise on the momentum of its USD2bn perpetual non-call five-year Additional Tier 1 trade priced in November.

"The success of the deal justifies our decision to tap into the momentum we had built during the extensive global roadshow completed for the dollar trade," said Steve Penketh, managing director, group treasury at Barclays.

Because it had explained all the various features of the deal for the dollar trade, Barclays was able to undertake the euro deal without having to conduct an extensive roadshow.

Having gone out at mid-to-low 8% area, guidance was refined to 8%-8.125%, for final pricing at 8%.

This was 25bp tighter that the dollar on a coupon basis, although this does not take into account the cross-currency swap and the fact that the dollar had performed very well in the secondary market. However, the call date on the euro transaction is two years later.

The strong performance of the new euro trade led market participants to say that Barclays had been very generous.

"They left a lot on the table and this traded up by three points, which tells you that it was cheap," said a banker.

Another said that while it was clear it was a strategic deal, the rally was substantial. "Having said that, it's a great deal for the market."

Barclays' Penketh said the bank's strategy had helped to support a still-developing and critical asset class for the European banking sector.

"Trying to shave an eighth off here or there on pricing misses the point. In a developing asset class, there is always an element of price discovery. Fair value is the target - the right calibrated balance for issuers and investors. Being too aggressive on pricing risks stifling the asset class before it gets off the ground."

Given that Barclays has said it needs to raise GBP6.6bn in the format, it is not surprising that it wanted to keep the investor base sweet.

This deal fulfils Barclays' objective of raising up to GBP2bn of CRDIV-qualifying Additional Tier 1 securities with a 7% fully loaded Core Equity Tier 1 ratio trigger, announced as part of its leverage plan on July 30 2013. The deal converts into equity if the bank breaches that ratio.

The 7% fully loaded trigger excludes Barclays' GBP7.6bn loss-absorbing cushion of goodwill capital. Just like Barclays' dollar Additional Tier 1 issue, coupons are non-cumulative, deferrable and there are no dividend pushers or stoppers.

The firm estimates that the capital cushion that protects investors from potentially having coupon payments suspended will shrink from GBP15bn in 2016 to GBP7bn in 2019 as higher capital requirements kick in.

This is because the level at which Barclays becomes subject to additional restrictions on making coupon payments will be raised from 7% CET1 to 9%.

Fund managers took 61%, hedge funds 21%, private banks 9%, insurance/pension funds 5%, banks 2% and others 2%.

The UK/Ireland accounted for 49%, the US 13%, Asia 11%, France/Benelux 8%, Switzerland 6%, Southern Europe 6%, the Nordics 5% and Germany/Austria 2%.

Barclays was sole bookrunner, while Bank of America Merrill Lynch, BNP Paribas, Commerzbank, Credit Agricole CIB, Credit Suisse and Morgan Stanley were joint leads. The transaction is rated B+/BB+ by S&P/Fitch.

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