Barclays finds home for riskiest CoCos yet

Fri Nov 15, 2013 8:21am EST

* UK bank attracts US$10bn of orders for Additional Tier 1 bond

* European issuers look to put dent in EUR600bn capital pile

* Market praises Barclays for careful execution

By Aimee Donnellan

LONDON, Nov 15 (IFR) - A high-risk jumbo CoCo sold by Barclays this week has revealed the deep pockets of the US investor base and opened the door for other European banks to begin tackling the EUR600bn capital pile that needs to be raised in the coming years.

The first Additional Tier 1 bond to target the US investor base had a lot riding on it. Barclays needs to raise a further US$1.25bn before June next year, European banks are coming under increasing pressure to boost their leverage ratios, and placing these instruments in the US market remains the cheapest option.

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.

"This is a very important trade for Barclays and other UK banks as it highlights the demand for equity convertible structures from the US investor base," said Peter Jurdjevic, head of balance sheet solutions at Barclays.

Barclays' own syndicate team, along with Citigroup, Deutsche Bank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo sold the SEC-registered deal mainly to US accounts.

Investors will receive an 8.25% coupon as a reward for the risks, which include being converted into equity should the bank's fully-loaded Core Tier 1 ratio fall below 7%, as well as coupons not being paid at all and being lost forever.

The 7% fully-loaded trigger excludes Barclays' GBP7.6bn loss-absorbing cushion of goodwill capital and is more aggressive than previous CoCo trades.

The deal's pricing and USD10bn order book should encourage other potential issuers into the market, which has already seen AT1 dollar bonds from Societe Generale and BBVA in Reg S format and a euro trade from Banco Popular Espanol.

"The fact that we have had a range of deals including a Spanish bank issue in the AT1 market, and now Barclays with a fully loaded high trigger instrument, shows the development of the market and will provide important pricing references for others seeking to access the space," said Mark Geller, head of European financial institutions syndicate at Barclays.

RAISE THOSE RATIOS

Global regulators have taken a more aggressive approach to force banks to clamp down on leverage - a measure of risk that regulators have recently brought into focus - and are allowing issuers to use Additional Tier 1 bonds to meet some of those requirements.

In the case of Barclays, the bank has been set a 3% leverage ratio target by the UK regulator which it needs to hit by June 2014. That ratio remained at 2.2% in the third quarter, even though the bank shed more than EUR100bn of assets and completed a GBP5.95bn rights issue.

Luckily for Barclays and other issuers of deeply subordinated debt, the market backdrop is incredibly supportive.

Yields have been falling across the bank capital spectrum in recent months, pushing investors into riskier securities.

Added to that, the cost of insuring subordinated bank debt has tightened throughout the course of the year, which in turn has driven down the coupons banks have to pay on these instruments.

But despite optimal market conditions, Additional Tier 1 is far from an easy sell. Coupon deferrals and a fully loaded high trigger are just some of the features Barclays had to include in its latest transaction to meet the UK's Prudential Regulation Authority and CRD IV requirements.

"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.

"The coupons are subordinated to the previous CoCos, but in this case you are slightly better off because you are getting equity instead of being written down to nothing if Barclays hits its trigger."

But US fund managers showed up in force - evidence, bankers say, that the market is maturing.

"Barclays has taken the whole market a step further with this transaction," said Simon McGeary, head of new products, EMEA, at Citigroup.

"They had grown up conversations with a new investor base, clearly set out the risks and mitigants for investors and have been rewarded for their efforts."

Barclays decided not to tighten pricing from initial thoughts in the low 8% range, setting final terms at 8.25% for what was a modestly sized USD2bn deal given the hefty level of orders.

"We deliberately determined to price the security to perform in the secondary market as a quid pro quo for the trust and loyalty showed by our principal investors who are vital in ensuring the development of this important asset class," said Steven Penketh, managing director at Barclays Bank.

The deal's success - bonds have traded up two points - should help the bank's next issue, and other borrowers' offerings too.

"The placement of this bond with a mixture of US, European and Asian real money accounts with a bit of hedge fund support will assist its liquidity and stability in the future and show other issuers the kinds of investors they can sell these instruments to," said Alexandra MacMahon, head of EMEA FIG debt capital markets at Citigroup.

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UPDATE 1-Max Bahr to enter liquidation after sale talks fail

Fri Nov 15, 2013 10:10am EST

* Talks with peer Hellweg fail over demands from RBS

* Hellweg unwilling to grant RBS a full guarantee

* Max Bahr to be sold off piecemeal, 3,600 jobs at risk (Adds statement from administrator)

By Arno Schuetze and Alexander Hübner

FRANKFURT, Nov 15 (Reuters) - Insolvent German home improvement store chain Max Bahr is to enter liquidation after talks to sell the retailer to rival Hellweg failed, its administrator said on Friday.

Max Bahr's parent Praktiker is already being liquidated after the administrator failed to find a buyer for the whole group.

The Max Bahr negotiations were at an advanced stage but collapsed over demands from Royal Bank of Scotland, owner of 66 of the chain's 73 buildings, the administrator said. He added that 3,600 jobs are now at risk.

Hellweg had teamed up with former Max Bahr chief Dirk Moehrle to make an offer of more than 100 million euros ($134 million), sources told Reuters last month.

But Hellweg declined to grant RBS a guarantee that would have enabled the bank to hold it accountable if Max Bahr ran into financial trouble, the administrator said. No-one at Hellweg was available for comment.

RBS, which declined comment on the matter, is now looking to rent out the Max Bahr sites. OBI, Rewe/Toom and Hagebau have expressed interest in about half the sites, two people familiar with the situation said.

RBS also turned down a bid from German DIY group Globus, which had offered to buy 60 Max Bahr outlets, after RBS had already turned down an earlier offer from Globus to rent stores, albeit at lower prices, another source said.

Praktiker, whose blue and yellow branded stores selling paints, tools and gardening products are a familiar sight in Germany's out-of-town shopping centres and which employed around 20,000 full- and part-time staff, filed for insolvency in July after talks with creditors failed.

The creditors had hoped that a sale of Max Bahr could help them recover some of their losses, but those hopes died when Max Bahr also filed for insolvency.

The Praktiker stores have already started a clearance sale and the same will now shortly happen in Max Bahr stores.

($1 = 0.7430 euros) (Editing by David Goodman and David Holmes)

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Judge rules against ResCap noteholders, knocks legal tactics

Fri Nov 15, 2013 2:51pm EST

* Judge calls noteholder tactics "unfortunate"

* Judge describes ruling as a split decision

* Disputes to spill into Tuesday's confirmation hearing

By Tom Hals

Nov 15 (Reuters) - Residential Capital LLC, a bankrupt mortgage lender, won a court ruling on Friday that it does not owe approximately $340 million in interest claimed by junior secured noteholders.

The ruling sets the stage for hearings next week on ResCap's plan to exit bankruptcy. U.S. Bankruptcy Judge Martin Glenn also criticized the legal tactics of the noteholders, who are virtually alone in opposing that plan.

Glenn ruled that the holders of the junior secured notes are undersecured, which prevents them from collecting interest that accumulated since ResCap filed for bankruptcy in May 2012.

Glenn, in New York, described his 119-page opinion, which covered a range of disputes, as a split decision. He ended it by saying that the noteholders have chosen to "contest everything and concede nothing (even when the court has questioned whether they were acting in good faith)."

He said their conduct led to drawn-out proceedings that have reduced the money available for other creditors.

"This is unfortunate!" Glenn wrote.

Aurelius Capital Management and Marathon Asset Management, two of the largest holders of the notes, did not immediately respond to requests for comment. Another investment firm holding a large amount of the notes, Davidson Kempner Capital Management, declined to comment.

Lewis Kruger, the chief restructuring officer for ResCap, declined to comment.

ResCap sought court protection on May 14, 2012, to address soaring mortgage liabilities. It had serviced about $374 billion of U.S. residential mortgage loans before its bankruptcy.

The dispute stems from a proposal to repay creditors that was backed by ResCap and its committee of unsecured creditors and funded with a $2.1 billion payment by parent Ally Financial Inc.

The proposed plan would pay junior secured noteholders $2.2 billion, which is their entire principal and the interest that was due prior to the bankruptcy.

However, the investment funds disputed that their notes were undersecured, and a trial on the issue began in October.

In his ruling on Friday, Glenn found the noteholders' collateral is worth $1.9 billion, less than the value of the securities and therefore leaving the notes undersecured.

Glenn wrote that he expected the noteholders to continue their give-no-ground approach in a hearing on ResCap's plan of reorganization, which is scheduled to begin on Tuesday.

U.S. taxpayers own roughly three-quarters of Ally, which was once part of General Motors Corp and which did not file for bankruptcy protection. Ally is focusing on auto lending, and trying to repay billions of dollars it still owes the government.

The case is In re Residential Capital LLC, U.S. Bankruptcy Court for the Southern District of New York, No. 12-12020.

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Talvivaara seeks debt restructuring, bankruptcy possible

HELSINKI Fri Nov 15, 2013 2:19am EST

HELSINKI Nov 15 (Reuters) - Loss-making Finnish miner Talvivaara will seek to restructure its debt and could apply for bankruptcy if that fails after a slew of production problems and a slump in the price of nickel.

Talvivaara said it was asking shareholders for a 40 million euro debt restructuring as part of a court-supervised reorganisation process.

It said it would probably file for bankruptcy proceedings if the reorganisation process fails. (Reporting by Ritsuko Ando; editing by Patrick Graham)

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UPDATE 1-Talvivaara seeks court-supervised overhaul to avoid bankruptcy

Fri Nov 15, 2013 3:12am EST

(Adds background, detail from statement)

HELSINKI Nov 15 (Reuters) - Loss-making Finnish miner Talvivaara , battered by falling nickel prices and a slew of production problems, said it would file on Friday for a court-supervised overhaul of the group, warning it otherwise risked bankruptcy.

Talvivaara - whose largest shareholder is the Finnish state, through its investment fund - pioneered the use of bacteria to extract nickel, a process called bioheapleaching, and was something of a national champion.

But it has faced repeated setbacks, from environmental troubles to operational hitches and a drop of more than a fifth in the price of nickel since the start of the year.

Talvivaara has been in talks to raise cash from investors.

On Thursday, it sought an additional 40 million euros ($54 million) from a group of shareholders to restructure its debt, but some said they would not pay unless Talvivaara applied for a corporate reorganisation.

It plans to do this on Friday.

If that fails, the company will apply for bankruptcy, a procedure which would have a "material value destructing effect", it said, adding the environmental impact would also be "difficult" to manage.

The firm said "there can be no assurance that Talvivaara will obtain the required funding through the restructuring facility or otherwise, or that Talvivaara's corporate reorganisation, if commenced, is ultimately successful."

($1 = 0.7430 euros) (Reporting by Ritsuko Ando; Editing by Patrick Graham and Mark Potter)

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Finnish state fund says more investment in Talvivaara not viable

HELSINKI Fri Nov 15, 2013 3:31am EST

HELSINKI Nov 15 (Reuters) - Finland's state investment fund Solidium said it had decided additional equity investment in Talvivaara was not viable and it was not involved in negotiations to help restructure the troubled miner's debt.

Talvivaara is looking at various ways of raising cash, and some investors had believed Solidium would step in.

Talvivaara is now seeking a loan for a court-supervised reorganisation process, and Solidium's investment director Hanna Masala said the fund could not help as it was an equity investor.

"We are not a party in these negotiations," Masala told Reuters. "Additional equity investment in Talvivaara was not something we see as a viable option." (Reporting by Ritsuko Ando; Editing by Mark Potter)

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UPDATE 5-Barclays paves way for more Additional Tier 1 bonds

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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Spanish appliance group Fagor files for bankruptcy

MADRID Wed Nov 13, 2013 11:20am EST

MADRID Nov 13 (Reuters) - Spain's biggest consumer appliance company Fagor said on Wednesday it had started insolvency proceedings after failing to reach a deal on debt which it needed to keep going as sales fell.

Spanish bankruptcies have risen steadily this year, after a prolonged economic downturn that sapped consumer spending and as bank lending falls.

Fagor, however, was part of the Mondragon group in the northern Basque Country region, a large cooperative seen as a flexible organisation that was riding out the crisis.

Fagor is the fifth-largest electrical appliance company in Europe. Its Irish subsidiary also started bankruptcy proceedings on Wednesday, while its French unit did the same last week. The company, which also operates in Morocco and Poland, said more subsidiaries would also file for insolvency in the coming days.

Fagor, which has total debt of 1.1 billion euros ($1.48 billion) according to Thomson Reuters data, began warning of liquidity problems as far back as 2009.

It needed 170 million euros to cover immediate liquidity needs, after filing for creditor protection in October, but Mondragon declined to provide the funds, leaving Fagor with few alternatives.

The company, which had just over 5,600 employees at the end of June, posted 2012 annual sales of 1.17 billion euros, down a third since 2007.

Companies in administration in Spain can emerge from bankruptcy if they work out a restructuring and a deal with creditors.

($1 = 0.7442 euros) (Reporting by Robert Hetz and Sarah White; Editing by Elaine Hardcastle)

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US Airways-American Airlines deal may mean higher prices -experts

By Karen Jacobs and Diane Bartz

ATLANTA/WASHINGTON Wed Nov 13, 2013 6:43pm EST

ATLANTA/WASHINGTON Nov 13 (Reuters) - Consumer advocates worry the decision to green-light another big airline merger will mean higher prices before long, even though upstart airlines will get more access to busy airports near Washington D.C. and New York as part of the deal.

In the short term, the industry is waiting for the sale of takeoff and landing slots by the merging US Airways Group Inc and AMR Corp's American Airlines, a process that will take several months and be overseen by the Department of Justice.

The largest airlines are expected to be barred from bidding, leaving the field open to upstarts such as JetBlue, Allegiant and Spirit, if they chose to participate.

Despite this, fliers will ultimately face higher airfares after the industry shrinks to just three major carriers, said Rick Seaney, chief executive of FareCompare.com, which tracks airfares.

"In the past decade, we've seen the industry transformed from one that boasted eight large airlines to a mere four. With the latest merger, it drops to three," Seaney said. "It is likely we'll be sitting around in 2020 saying, 'I wish we still had eight carriers.'"

Industry experts were uncertain how much airfares might ultimately rise on different routes as a result of the merger.

However, Delta's merger with Northwest Airlines in 2008 led to price increases of more than 10 percent on four of the routes they dominated, as well as service cuts on another route, according to research by the American Antitrust Institute.

Based on the details on a settlement announced on Tuesday, antitrust experts said the consumers who could benefit would be those who use New York's LaGuardia, Reagan National outside Washington D.C. and other major airports.

Consumers flying outside those markets, for example from Dallas to Charlotte, could be hurt, said Jeffrey Shinder, an antitrust expert at Constantine Cannon LLP.

"Some consumers will end up being better off," said Shinder. "(But) I think in the long run, because it will take a bit for this to play out, that prices will be higher because of the transaction."

George Hoffer, a transportation economist at the University of Richmond, said consumers will face higher prices, a key concern the Department of Justice raised in August when it opposed the merger.

"In all the trenches there is one less competitor. Therefore, the remaining firms have more pricing power," Hoffer said.

He noted that Delta Air Lines Inc's stock hit an all-time high after the US Airways-American merger settlement was announced.

"The market realizes Delta now has more pricing power," Hoffer added.

However, Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law, praised the decision as farsighted.

"The leg up that the government has given some of the low cost carriers, I think, is going to have a very positive impact on the industry," he said.

Under the deal announced on Tuesday, US Airways and American Airlines agreed to sell 104 take off and landing slots at Reagan National and 34 at Laguardia, along with supporting gates and ground facilities.

They must also sell two gates at five other airports: Chicago O'Hare International, Los Angeles International, Boston Logan International, Miami International, and Dallas Love Field.

Sixteen of the 104 Reagan National slots are currently leased to JetBlue Airways Corp and will be offered to JetBlue permanently, according to the settlement agreement.

The Department of Justice will run the sale and is expected to bundle slots into groups of six to 10, to be sold along with a gate. The airlines will be allowed to sell the slot and gate bundles or make trades for them.

The government will also determine which carriers are eligible to buy or trade for slots.

The carriers are expected to include Southwest Airlines Co , JetBlue and Virgin America, all of which have previously expressed interest in gaining access to US Airways-American assets. Other low-cost carriers include Allegiant Travel Co and Spirit Airlines.

"My expectation is that the DOJ is going to not include United or Delta on the list of qualified buyers," a source close to the airlines told Reuters.

Delta said on Wednesday it was urging the Justice Department to allow all airlines to purchase slots, saying it wanted to bid for slots and facilities at National Airport as well as Dallas.

Under the proposed final judgment, the slots must be sold within 90 days of either the deal closing or when the Justice Department draws up the bundles of slots and gates.

The new carriers could be using some slots by June and certainly by the fall of 2014, according to an expert familiar with the settlement, who could not be named because he was not authorized to speak on the record.

American has asked the court considering its bankruptcy case to approve the settlement in a hearing set for Nov. 25. The companies anticipate closing the deal in the first half of December.

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Going for broke: Company's fourth bankruptcy may be a record

By Tom Hals

Tue Nov 12, 2013 5:13pm EST

Nov 12 (Reuters) - Global Aviation Holdings Inc may not be a household name, but it should be familiar to bankruptcy lawyers. On Tuesday, the charter air transport firm filed what is likely a record fourth Chapter 11 bankruptcy.

The company is the biggest provider of commercial charter airline services to the U.S. military and it blamed the fourth filing since 2004 on government cutbacks, according to documents filed in the U.S. Bankruptcy Court in Wilmington, Delaware.

Global Aviation or previous incarnations filed bankruptcies in 2004 and 2006 in the Southern District of Indiana and last year in the Eastern District of New York. The second Indiana filing was by a subsidiary, ATA Airlines Inc.

The company did not immediately respond to a request for comment.

Repeat filings are not uncommon.

About one-third of larger companies that file for Chapter 11 find themselves back in bankruptcy court within four years, according to research by Edith Hotchkiss, a professor at Boston College, who described the return debtors as "Chapter 22s."

Rare are those that end up in court a third time. A paper by Edward Altman, a New York University professor, listed 10 companies that shared that unwanted distinction, including Trans World Airlines and retailers Grand Union Co and Levitz Home Furnishings Inc.

But four times appears unprecedented, at least under the current bankruptcy code.

Altman noted one four-timer in his 2009 paper, Trans Texas Gas Corp, but its first filing preceded what is considered the modern era of bankruptcy that began with legal changes in 1978.

Altman also pointed out that Donald Trump has had four bankruptcy filings associated with his entertainment ventures, although the professor excluded them from his research as they relate to different hotels.

Global Aviation's previous bankruptcies were particularly hard on general unsecured creditors, such as suppliers. The best they did was in the company's 2006 bankruptcy, when court records indicate they were expected to get as much as 2.4 percent of what they were owed.

The case is In re: Global Aviation Holdings Inc, U.S. Bankruptcy Court, District of Delaware, No. 13-12945.

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