* 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 investors.
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 curve.
“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 419bp.
“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 statutory approach.
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, Philip Wright)