* FSA, BoE both back first true CoCo sold from UK bank
* Barclays tests investors with 7% trigger
* Bond writes down rather than converts to equity
By Helene Durand and Aimee Donnellan
LONDON, Nov 6 (IFR) - The planned Barclays contingent
capital (CoCo) bond is getting wide attention in the market,
which is waiting to see not only how much the capital will cost
but also how this latest experiment in improving bank balance
sheets will be treated by regulators.
The bank is poised to file with the SEC on Tuesday in what
will be the first true test for CoCos out of the UK, amid an
uncertain regulatory environment for the still-developing
"This will be an interesting trade," said a hybrid capital
"There has been a lot of debate around contingent capital.
And while it wasn't endorsed by global regulators as an
asset-class under Pillar 1, the fact that the UK regulator is
endorsing it under Pillar 2 means that other regulators might
take a second look, and we do see a real market spring up."
In recent months, the Bank of England's Financial Policy
Committee and the UK Financial Services Authority have both come
out in favour of contingent capital.
In minutes published in July, the FPC said that "banks might
issue equity or contingent capital instruments on terms approved
by the FSA, incorporating high triggers for conversion."
The Barclays CoCo features a full write-down rather than a
conversion into equity that some regulators consider to be
potentially destabilising for a bank.
The instrument will trigger if the bank's Common Equity Tier
1 (post CRD IV) ratio falls below 7%. If the bank hits that
trigger, then the instrument would be completely written-off,
thus creating instant capital for the bank.
The 7% trigger is well below the SIFI (systemically
important financial institution) buffer, which requires banks
that are considered too big to fail to carry 9% common equity
capital and below which Barclays will be required to restrict
discretionary payments such as dividends and discretionary
compensation. It is therefore expected that the 7% trigger would
be shielded by at least a 2% capital layer.
The FSA has been actively involved in the development of the
CoCo product in the UK, and approves of the 7% trigger, which it
considers to be adequately protected by the additional layer of
TIER 2 HOST
The Barclays deal is expected to be treated as Tier 2
capital under Pillar 1, the minimum capital requirements set by
global and European regulators.
But market participants expect it will also meet the Pillar
2 additional capital requirments on banks that are set by local
So far, only Swiss banks have been required to issue
contingent capital, under the so-called Swiss finish, while
other regulators have been wary of endorsing these instruments.
Barclays will begin a two-week global roadshow Tuesday for
the new CoCo via its in-house investment bank, Citi, Credit
Suisse, Deutsche Bank and Morgan Stanley, in what is only the
second-ever CoCo issue in the UK.
Because the first, from Lloyds in 2009, was part of that
bank's distressed recapitalisation, the Barclays issue will be
the first true measure of how investors respond to the product.
In particular, the deal will test how far investors are
prepared to go in search of yield, especially as it has a high
trigger - the UBS issue has a 5% trigger, for example - and
carries a severe potential loss.
Credit Suisse's CoCo had a "high-trigger" of 7%, but was
convertible into equity, thereby giving converted bondholders a
stake in the bank should it recover.
Rabobank also sold a Senior Contingent Note issue with a
relatively high trigger of around 7%, but investors get 25% of
par upon the conversion trigger being hit.
For Barclays, the instrument is thought to be cheaper than
issuing equity as it is expected to be tax-deductible. And
unlike a CoCo deal convertible into equity, there is no dilution
threat for shareholders.