* Leads start marketing at mid-8% for junk-rated deal
* Barclays' non-viability, high trigger template utilised
By Christopher Whittall
LONDON, Jan 17 (IFR) - The outcome of Belgian bank KBC's
contingent convertible Reg S US dollar bond is being closely
watched, providing the first real test of investor demand for
CoCo bonds in 2013.
The 10-year non-call five subordinated Tier 2 benchmark
follows the success of last week's EUR1bn Bank of Ireland sale
which attracted EUR5bn of orders for a three-year EUR1bn CoCo.
While significant both for Ireland and the wider market, the
BoI 8.25% equity conversion transaction was something of an
exception: a short-dated instrument bought by the Irish
government as part of a bailout in 2011 and now remarketed to
The KBC deal should provide a better indication of investor
appetite for CoCos, bankers say, with leads beginning marketing
it at mid-8% area. Bookrunners - which include Bank of America
Merrill Lynch, Credit Suisse, Goldman Sachs, JP Morgan and
Morgan Stanley - pointed to Barclays' blow-out CoCo last
November as the main pricing reference point.
Barclays attracted USD17bn of demand for its BBB- rated Tier
2 10-year bullet and only paid a coupon of 7.625%, despite it
being the most aggressive deal yet of its kind. The CoCo has
since performed well, narrowing from its initial pricing of
Treasuries plus 604bp to 556bp over, according to Tradeweb.
There are some important differences with the KBC
transaction, though, which is expected to be rated BB+ by S&P.
As well as not achieving an investment-grade rating and the
five-year call option for the issuer, it is not issued under
rule 144a, so will not be able to tap into the US investor base.
One observing banker said the KBC guidance looked a bit
expensive for investors given there is at least a 1%
differential between the five and 10-year part of the swap
"It will be interesting to see whether or not investors
respond well to the price," said the banker. "If investors go
for this structure and pricing I think it will be a good
indicator of demand for these kinds of products."
Others thought the pricing looked reasonable, but signalled
that weaker credit markets might hamper execution. Barclays'
CoCo, for instance, closed at Treasuries plus 561bp yesterday,
having tightened to a low of plus 538bp on January 11.
"The problem is the market is a bit wobbly. At that price it
should go okay, but in a choppy market it doesn't matter how
good a name it is, it may still be a bit of a struggle," said
one syndicate official.
A syndicate banker on the deal agreed the market had been
softer over the past couple of days, but pointed out it was
stronger today, with iTraxx Crossover tightening around 10p, to
"There was an extensive roadshow and a lot of investor
interest with fairly positive feedback. It should be a decent
order book. There's plenty of demand; it really comes down to
price," a DCM banker on the deal said.
Despite some important differences, the KBC CoCo in other
ways seeks to emulate Barclays' November deal. It too has opted
for a permanent write-down feature triggered when common equity
falls below 7%. KBC's pro forma common equity is 12.7%.
The Belgian bank has also taken the same view on the final
shape of bank capital rules by not including contractual point
of non-viability language in the structure, instead relying on a
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. Requirements are
expected to be clarified in the publication of CRD4 in the first
half of this year.
(Reporting By Christopher Whittall; editing by Alex Chambers,