BREAKINGVIEWS-Barclays' CoCo bond needs generous pricing

Thu Nov 8, 2012 9:46pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Neil Unmack

LONDON, Nov 8 (Reuters Breakingviews) - Imagine a bond that can inflict total wipe-out on investors, even though the issuer's shareholders are still in the money. It sounds topsy-turvey. But Barclays (BARC.L) thinks it can find plenty of buyers for just such an instrument.

The UK bank aims to be the first British issuer of so-called contingent capital bonds in the primary debt markets. These "CoCos" differ from traditional bonds in that they are designed to bear losses if a bank’s capital position gets weaker in a crisis. Either they convert into equity, or they get written off.

This CoCo is at the riskier end of the spectrum. Its loss-absorbing role kicks in well before Barclays' capital ratio hits rock bottom - when the bank’s common equity Tier 1 ratio falls below 7 percent. What's more, it gets written off rather than becoming stock.

The terms were hammered out between Barclays and the UK Financial Services Authority. The CoCos will count only as lower-quality “Tier 2” capital. Still, they may also qualify for the supplementary cushion regulators demand over minimum capital requirements.

Lloyds (LLOY.L) forced a similar coco on its bondholders in 2009 via a debt exchange. Bonds sold by Switzerland’s UBS (UBSN.VX) also have 100 percent write-off. But both of these have a low, 5 percent capital-ratio trigger. By contrast, Barclays is the first bank to market a high-trigger, total-loss instrument to new investors.

It is strange then that Barclays is rumoured to be targeting an ambitious coupon of about 7 percent. True, in a low-return world, it may look tempting. And the risks of total wipe-out are remote; the trigger point is below the 9 percent minimum core capital ratio Barclays has to keep as a systemically-important financial institution. If Barclays’ ratio fell through that, it would have to time to rebuild capital. Barclays would need to torch an estimate 23 billion pounds of capital before the CoCos got burned, based on forecasts for its year-end 2013 balance sheet.

Still, Lloyds’ less risky CoCos are themselves yielding about 7 percent. Investors should demand more from Barclays.

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CONTEXT NEWS

- Barclays Plc plans to sell its first contingent capital securities. The bonds will pay a fixed coupon over 10 years, but can be written down to zero if the banks common equity core Tier 1 ratio falls below 7 percent. The bonds follow similar contingent capital securities by UBS and Credit Suisse.

- Reuters: UK regulator takes tough stance on Barclays CoCo issue [ID:nL5E8M76PB] - For previous columns by the author, Reuters customers can click on [UNMACK/]

(Editing by Chris Hughes and David Evans)

((neil.unmack@thomsonreuters.com))

((Reuters messaging: neil.unmack.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS BARCLAYS/COCO

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