LONDON, Sept 5 (IFR) - Barclays could lose the regulatory
benefit from its contingent capital notes if the PRA takes a
more a stringent line on Pillar 2 capital, which could lead to
the notes being called early or being the subject of a liability
management exercise, according to research from BNP Paribas.
The Prudential Regulatory Authority is proposing that firms
should meet Pillar 2A capital requirements (for risks not
captured or not fully captured under the CRR) with at least 56%
Common Equity Tier 1 from January 2015. It is consulting on
whether to increase this to 100% by January 2016.
Right now, any bank capital can be used to meet these needs,
but Common Equity Tier 1 (CET1) is the tightest definition of
bank capital and excludes all hybrids in debt hosts.
The PRA acknowledges that "this change may increase the cost
of capital for some firms to the extent that existing, voluntary
capital buffers are not of sufficient quality to support Pillar
If these rules are put in place and the Barclays notes are
not grandfathered, then "they no longer qualify for Pillar 2 and
become just relatively expensive Tier 2 for Pillar 1 for which
loss absorption in the T&Cs is not required", according to the
BNP Paribas analysts.
HSBC's EUR1.5bn Tier 2, for example, was priced at mid-swpas
plus 195bp on Tuesday (3.375% coupon, 99.878 reoffer price),
while Barclays paid 7.75% for its USD1bn T2 Coco in April.
The Barclays notes have a regulatory call event in place,
allowing redemption at par if they fully lose Tier 2 status
(subject to prior regulatory approval). However, losing Pillar 2
status would not trigger this event.
"If [the bonds no longer qualify], we would imagine that
Barclays would likely want to do a liability management on these
instruments, potentially as an exchange into AT1s, but not
necessarily," said the analysts.
Barclays declined to comment.
The report from BNPP also considers the impact on Lloyds'
ECNs in the same scenario. These bonds are Lower Tier 2, but in
contrast to the Barclays notes, have a call at par for loss of
Pillar 2 status "if ECNs lose either Tier 2 status under Pillar
1 or CT1 status under Pillar 2".
The BNP Paribas analysts say that they do not expect a call
at par, since the ECNs are trading over par (the most liquid
notes at 103.40, some in 105-107 area), and Lloyds would want to
preserve its reputation in the market.