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By Helene Durand
LONDON, Nov 13 (IFR) - Barclays appears on track to price a highly risky bank capital instrument later on Wednesday, after it attracted around US$6bn of demand for an Additional Tier 1 contingent capital (CoCo) deal that has entirely discretionary coupon payments.
It is marketing the bond, which is perpetual but callable in five years, with a coupon in the low 8% area.
Barclays has priced two CoCo deals in the last 12 months, but this is the first test of investor appetite for a security that is perpetual and has optional coupons.
"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.
But yields have been falling across the bank capital spectrum on a global basis in recent months, pushing investors into riskier securities.
There is a lot riding on the deal for the wider bank sector too. The market for these new-style hybrids could grow to at least EUR450-600bn in Europe and US$400-500bn in the US, according to estimates by Citigroup.
Barclays is raising the capital as part of a plan to boost its leverage ratio, a measure of risk that regulators have recently brought into focus.
Barclays has been set a 3% target for its leverage ratio, which it needs to hit by June next year. The ratio stayed at 2.2% in the third quarter, even though the bank shed more than EUR100bn of assets and completed a GBP5.95bn rights issue.
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Investors and banks have to contend with a regulator that keeps moving the goal posts for UK institutions. In August, the Prudential Regulation Authority proposed that banks should have a capital safety net of nearly 12% of their risk-weighted assets, significantly higher than the 10% they had been working towards.
"If the bank starts to eat into its Combined Buffer Requirement, it can't pay coupons, and given that the PRA keeps adjusting the capital UK banks need to have, it's unclear to us what the buffer will be," said one investor.
He argued that given the low 8% guidance and potential risk to coupon payments, the deal did not offer enough value.
The size of the order book, however, shows that despite these misgivings about the potentially toxic nature of the instruments, many investors are still willing to get involved.
FULLY LOADED
On Wednesday, Fitch said that coupons for new Basel III compliant securities would be likely hit before a trigger to equity conversion or write-down of principal, unless a bank suffers a large and sudden loss.
"Fitch believes the most easily activated form of loss-absorption is the non-payment of interest on AT1 securities," the agency said.
Some investors argued that buyers of the Barclays deal are putting faith in its management's statement that the bank intends to respect the traditional capital hierarchy when it comes to paying coupons on the hybrids.
"...however, the board may at any time depart from this policy at its sole discretion," Barclays said in an investor presentation.
Under the terms of the deal, the bonds can convert into equity if the bank's fully-loaded Core Tier 1 ratio falls below 7%. The fully-loaded trigger means the bank's GBP7.6bn of goodwill capital, which currently acts as part of its loss-absorbing cushion, will not be counted towards the capital buffer for this deal.
Barclays' own syndicate team, along with Citi, Deutsche Bank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo are managing the SEC-registered offering, which is expected to price later today.
(Reporting by Helene Durand, additional reporting by Aimee Donnellan, editing by Julian Baker)
((aimee.donnellan@thomsonreuters.com)(020 7369 7675)(Reuters Messaging: aimee.donnellan.thomsonreuters.com@thomsonreuters.net))
Keywords: BARCLAYS ADDITIONAL TIER 1
