Wed Nov 13, 2013 5:17pm EST
By Danielle Robinson and Aimee Donnellan
NEW YORK/LONDON Nov 13 (IFR) - Barclays on Wednesday priced a US$2 billion Additional Tier 1 contingent capital (CoCo) bond at 8.25%, aiming to shore up its capital to meet stricter new banking regulations.
Barclays attracted some US$10 billion in global orders for the risky security, which can convert into equity if the UK bank's capital falls below a regulatory threshold.
Despite the flood of orders, however, the bank opted not to tighten the pricing from guidance or increase the size of the deal.
Instead Barclays appeared intent on making sure the trade does well in the secondary market - and that it paves the way for tens of billions in similar deals expected to come to the US dollar market from European banks.
The strategy paid off. The deal freed to trade at a dollar price of 101 bid, 101.375 offered.
The market for these new-style hybrid bonds could grow to at least EUR450-600bn in Europe and US$400-500bn in the US, according to estimates by Citigroup.
"There was an effort to ensure there was performance, because there was a view that they (Barclays) have about another US$1.25 billion of AT1 securities to issue by June next year," said one market source.
"The other reason for not pulling in price is that this is a new product, and it doesn't pay to be greedy when there is a whole host of institutions that have to come to the US market to optimize their capital structure by issuing AT1 debt."
The bond is perpetual but callable in five years.
The SEC-registered offering priced at 99.9930 via Barclays' own syndicate team, along with Citigroup, Deutsche Bank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo.
NEW RULES
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.
The bank has been set a 3% target for its leverage ratio, which it needs to hit by June 2014. Its ratio stayed unchanged at 2.2% in the third quarter, even though the bank shed more than EUR100bn of assets and completed a GBP5.95bn rights issue.
In August, the UK's 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.
Barclays has priced two CoCo deals in the last 12 months, but this was the first test of investor appetite for a security that is perpetual and has optional coupons.
But yields have been falling across the bank capital spectrum on a global basis in recent months, pushing investors into riskier securities.
The size of the order book, however, showed that despite misgivings about the potentially toxic nature of the instruments, many investors wanted to get involved.
"Investors are going to evaluate the structure based on that performance," said another investor.
"This will be the market that Barclays and other European banks will want to tap with Tier 1 securities over time."
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 acts as part of its loss-absorbing cushion, will not be counted towards the capital buffer for this deal.
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