* High-trigger CoCo to remain the preserve of top banks
* Bondholder opinions split on structure
* Poor aftermarket performance blamed on weaker backdrop
By Helene Durand and Danielle Robinson
LONDON, Nov 16 (IFR) - A USD3bn high-trigger total loss bond
priced by Barclays Bank this week will set the market up for
other issuers from the UK and elsewhere in Europe, the bank
argues, although others still question who will emulate the
trade without formal global regulatory endorsement.
The UK bank is paying only a 7.625% coupon for the BBB-
rated Tier 2 10-year bullet that attracted USD17bn of demand
despite the structure being the most aggressive of its kind yet.
Under the terms of the deal, which was led by Barclays,
Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, the
notes will be automatically written down to zero if the bank's
Common Equity Tier 1 ratio falls below 7% (post CRD4).
"CRD4 requires banks to hold 1.5% of your RWAs in contingent
capital and we need to start to build interest in this market.
This transaction and the investor support it received will be
relevant for other institutions in Europe," said Steven Penketh,
managing director, Barclays Treasury.
Global regulators have not explicitly endorsed contingent
capital but have asked that all bank capital instruments be able
to absorb losses at the point of non-viability or before any
taxpayer money is injected into a bank.
The CRD4 draft requires that banks can either writedown or
convert into equity Additional Tier 1 instruments at a minimum
pre-set trigger of 5.125%, while there is no hard-wired trigger
for Tier 2 instruments. The Barclays issue goes above and beyond
"This deal expands the envelope and it clearly got a very
strong response from the market. But I think this will be
something that only top tier banks will use," said Simon
McGeary, head of the new products group at Citigroup.
"There are some investors who still have reservations about
the structure and the high-trigger but got comfortable because
of the credit and how far the bank will operate from that
Under the CRD4 transitional rules, Barclays' Common Equity
Tier 1 ratio is expected to be at 12.1% by the end of next year,
giving a 510bp buffer above the trigger level. Furthermore, as a
systematically important financial institution, Barclays will
have to operate at least 2% above the 7% Common Equity Tier 1
ratio set by Basel.
McGeary added that having a major jurisdiction, a big issuer
and an important regulator endorse the instrument may mean that
others revisit their thinking around the product.
"It's worth pointing out that the UK has a long history of
exercising real discretion under Pillar 2 and that level of
discretion has not been there in the same way in other
jurisdictions," he said.
Depending on the size of Barclays' balance sheet going
forward, the bank could sell as much as GBP8bn of this type of
debt over the next six-years.
Another hybrid banker said that what was applicable to
Barclays and the UK might not apply to others, and that it was
not quite the time to go CoCo nuts yet. "Other will continue to
look at adhering to the global minimum capital requirements
through raising Tier 2 and Additional Tier 1 under Pillar 1," he
SWEEPING UP THE GLOBE
Barclays carried out a global charm offensive for over a
week and began marketing the deal in the US on Tuesday at mid to
As demand grew, with USD10bn coming from Asia, Barclays had
to strike the right balance between size and pricing. The issuer
opted for size and priced the trade with a 7.625% coupon, which
equated to 603.7bp over Treasuries and was some 300bp back from
Barclay's existing Lower Tier 2 debt, the wider end of the
premium market participants thought it would have to offer.
Unlike recent bank capital issues in Reg S format (which
mainly sold into private bank networks), the Barclays trade had
to cater for institutional investors, making it difficult to
price through initial price guidance.
Final allocations saw fund managers take 42.5%, private
banks 27.5%, insurance companies 10.7%, hedge funds 10.5%, banks
6.2% and others 2.6%. US investors were allocated the lion's
share of the bonds at 51.9%, followed by Europe at 27.7%, Asia
at 16.1% and others at 4.3%.
The strong US take-up was helped by the strong performance
of UBS' low-trigger contingent capital issuer launched this
"The UBS deal traded better than anyone thought it would,"
said one banker. "It has gone up to 110 which has prompted the
market to take a good hard look at the product."
STILL AN ACQUIRED TASTE
Some institutional investors, in particular in Europe, still
find CoCos are an acquired taste, arguing that their success is
proof of a raging bull market.
"Hopefully other issuers won't use this particular CoCo
structure as a precedent," said Satish Pulle, a portfolio
manager at ECM, echoing the view of many.
"From an equity investor perspective, I can see why they
would do it: it allows them to get all the upside in
the good times and protect their downside in the bad times," he
He complains that this security is junior to equity, and
weakens shareholders' incentive to prevent excessive risk-taking
However, Andrew Fraser, a FIG analyst at Standard Life
Investments said that investors would have to get used to
loss-absorbing features, whether they like or not.
The bond's poor aftermarket performance, where it dropped by
as much as two points, was a setback, and fuelled speculation
that investors who had put in heavily inflated orders ended up
with more bonds than they bargained for.
However, bankers close to the deal said the whole financial
sector had performed poorly overnight on the back of negative
headlines, with sub issues from the likes of Citigroup and
Prudential trading down by more than a point.