(Corrects 17th paragraph to show Barclays is not the only Yankee issuer to tap US investor base with a CoCo)
By Aimee Donnellan and Danielle Robinson
LONDON, April 4 (IFR) - Barclays has defied the doubters with its new CoCo bond, pricing an unusual 10-year non-call five issue that critics said would be a tough sell to US investors.
The bank priced the USD1bn issue with a 7.75% coupon on Wednesday, drawing an order book in excess of USD3.5bn and selling more than 50% of the deal to US accounts.
"We communicated a desire for a standard, modest benchmark size and managed to engage US and European institutional investors en masse which is exactly what we hoped to do," said Jennifer Moreland, head of long-term unsecured funding and capital issuance at Barclays.
"This is a ground-breaking structure and the next logical step in our plan to raise additional capital."
Many in the market - bankers and investors alike - were critical of the deal, not least because it was announced ahead of the long Easter holiday weekend.
Others doubted whether US investors, who normally prefer a 10-year bullet structure, would welcome a 10NC5.
That structure is rarely seen in the investment-grade bond market, let alone on an issue that will be written down to zero if the bank's common Tier 1 capital drops below 7%.
Some questioned why investors would buy a 10NC5 when the bank's 10-year bullet CoCo, priced in November, is available at around the same yield.
That issue, Barclays' first permanent write-down bond, attracted an order book of USD17bn.
But in the end, distribution statistics showed, the new Barclays issue was placed almost entirely with institutional investors - more than 50% in the US, a third in Europe and the remainder in Asia.
Despite the naysayers, some observers felt that the deal was a step forward in the development of a CoCo Yankee market - a market that could become a crucial provider of the Tier 2 bail-in-able capital that UK and European banks need to raise.
"I think the fact that they got a 10NC5 done will really encourage the likes of RBS and Lloyds and the Scandis to tap the US market," said one investor.
"Other banks that are less market astute will, I'm sure, be looking to sign up Barclays to lead a CoCo for them."
Moreland shared that view.
"I assume other jurisdictions are closely watching what we are doing, but we don't have direct knowledge of that. With each data point we put into the market we are showing that there is investor demand for write-off structures which will be interesting to other issuers," she said.
Britain's banks have been told to raise GBP25bn of extra capital by the end of the year to absorb any future losses on loans, the central bank said last week.
UBS tapped the US domestic institutional investor base with a CoCo under the SEC rule 3(a)2. Barclays has been the most aggressive in terms of structure to date, having been the first to issue a deal with a 'high trigger' of 7% and permanent writedown language. The Barclays deal will count as Tier 2 capital for the bank.
The new issue was trading slightly above par on Thursday morning in New York, at USD100.5 bid versus USD100.6 offered.
Investors who jumped into the deal believe that in a couple of years, it will look like it priced cheaply.
Some think it could tighten as much as 100bp-200bp over the next two years, as more CoCos come to the Yankee market and a dedicated group of buyers develops for the product.
European and Asian private bank accounts have already shown a preference for the 10NC5 structure, so the new US demand can only be a good thing. It is considered by some issuers to be a more economically efficient way of raising Tier 2 CoCos than a bullet structure.
Having a price just slightly inside the 7.80% trading level on the 10-year bullet CoCo went a long way to winning over the US investor base - even though the economic justification would have carried more weight had it priced at 7.50%.
"You're getting this deal that essentially has a five-year duration at a yield for a 10-year bullet," said one investor.
Another big attraction for investors was the fact that, if it is not called, the 10NC5 resets to a fixed-rate level that is the initial mid-swaps plus 683.3bp launch spread plus the five-year mid-swap rate at the time of the call.
The deal was also seen as offering good value when compared with KBC's Reg S-only 10NC5, which has been trading around the high 7% area, even though it is not as good a credit as Barclays.
Barclays was the global co-ordinator and bookrunner on the deal, with Bank of America Merrill Lynch, BNP Paribas, Morgan Stanley and Wells Fargo also joining as bookrunners. (Reporting by Aimee Donnellan and Danielle Robinson; editing by Natalie Harrison and Marc Carnegie)