* UK bank attracts US$10bn of orders for Additional Tier 1 bond
* European issuers look to put dent in EUR600bn capital pile
* Market praises Barclays for careful execution
By Aimee Donnellan
LONDON, Nov 15 (IFR) - A high-risk jumbo CoCo sold by Barclays this week has revealed the deep pockets of the US investor base and opened the door for other European banks to begin tackling the EUR600bn capital pile that needs to be raised in the coming years.
The first Additional Tier 1 bond to target the US investor base had a lot riding on it. Barclays needs to raise a further US$1.25bn before June next year, European banks are coming under increasing pressure to boost their leverage ratios, and placing these instruments in the US market remains the cheapest option.
The market for these new-style hybrid bonds could grow to at least EUR450-600bn in Europe and US$400-500bn in the US, according to estimates by Citigroup.
“This is a very important trade for Barclays and other UK banks as it highlights the demand for equity convertible structures from the US investor base,” said Peter Jurdjevic, head of balance sheet solutions at Barclays.
Barclays’ own syndicate team, along with Citigroup, Deutsche Bank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo sold the SEC-registered deal mainly to US accounts.
Investors will receive an 8.25% coupon as a reward for the risks, which include being converted into equity should the bank’s fully-loaded Core Tier 1 ratio fall below 7%, as well as coupons not being paid at all and being lost forever.
The 7% fully-loaded trigger excludes Barclays’ GBP7.6bn loss-absorbing cushion of goodwill capital and is more aggressive than previous CoCo trades.
The deal’s pricing and USD10bn order book should encourage other potential issuers into the market, which has already seen AT1 dollar bonds from Societe Generale and BBVA in Reg S format and a euro trade from Banco Popular Espanol.
“The fact that we have had a range of deals including a Spanish bank issue in the AT1 market, and now Barclays with a fully loaded high trigger instrument, shows the development of the market and will provide important pricing references for others seeking to access the space,” said Mark Geller, head of European financial institutions syndicate at Barclays.
Global regulators have taken a more aggressive approach to force banks to clamp down on leverage - a measure of risk that regulators have recently brought into focus - and are allowing issuers to use Additional Tier 1 bonds to meet some of those requirements.
In the case of Barclays, the bank has been set a 3% leverage ratio target by the UK regulator which it needs to hit by June 2014. That ratio remained at 2.2% in the third quarter, even though the bank shed more than EUR100bn of assets and completed a GBP5.95bn rights issue.
Luckily for Barclays and other issuers of deeply subordinated debt, the market backdrop is incredibly supportive.
Yields have been falling across the bank capital spectrum in recent months, pushing investors into riskier securities.
Added to that, the cost of insuring subordinated bank debt has tightened throughout the course of the year, which in turn has driven down the coupons banks have to pay on these instruments.
But despite optimal market conditions, Additional Tier 1 is far from an easy sell. Coupon deferrals and a fully loaded high trigger are just some of the features Barclays had to include in its latest transaction to meet the UK’s Prudential Regulation Authority and CRD IV requirements.
“The big worry for this transaction and ones like it is the coupon deferral risk,” said Dierk Brandenburg, a senior bank credit analyst at Fidelity.
“The coupons are subordinated to the previous CoCos, but in this case you are slightly better off because you are getting equity instead of being written down to nothing if Barclays hits its trigger.”
But US fund managers showed up in force - evidence, bankers say, that the market is maturing.
“Barclays has taken the whole market a step further with this transaction,” said Simon McGeary, head of new products, EMEA, at Citigroup.
“They had grown up conversations with a new investor base, clearly set out the risks and mitigants for investors and have been rewarded for their efforts.”
Barclays decided not to tighten pricing from initial thoughts in the low 8% range, setting final terms at 8.25% for what was a modestly sized USD2bn deal given the hefty level of orders.
“We deliberately determined to price the security to perform in the secondary market as a quid pro quo for the trust and loyalty showed by our principal investors who are vital in ensuring the development of this important asset class,” said Steven Penketh, managing director at Barclays Bank.
The deal’s success - bonds have traded up two points - should help the bank’s next issue, and other borrowers’ offerings too.
“The placement of this bond with a mixture of US, European and Asian real money accounts with a bit of hedge fund support will assist its liquidity and stability in the future and show other issuers the kinds of investors they can sell these instruments to,” said Alexandra MacMahon, head of EMEA FIG debt capital markets at Citigroup.