Barclays broke new ground in the global capital markets on Wednesday, 14 November 2012 when it priced a USD 3bn CoCo bond that is the first total loss high trigger capital security ever offered by a bank.
CoCos or contingent convertible notes, are slightly different to regular convertible bonds in that the likelihood of the bonds converting to equity is “contingent” on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.
The UK bank is paying only a 7.625% coupon for the BBB- rated Tier 2 10-year bullet that attracted USD 17bn of demand despite the structure being the most aggressive of its kind yet.
As per Reuters, under the terms of the deal, which was led by Barclays, Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, the notes will be automatically written down to zero if the bank’s Common Equity Tier 1 ratio falls below 7%. In a typical contingent convertible, or CoCo bond, the regulatory trigger causes the bondholders to become equityholders with a stake in the company. For the Barclays bond, however, the value of the asset simply falls to zero, and there is no conversion to equity, making them extra risky.
The additional risk versus senior bonds means investors demand extra compensation. As per The Wall Street Journal, the 10-year bonds sold at par to yield 7.625%, below earlier price guidance on the deal of 7.75%. That’s more than double the 3.1% yield of Barclays’s senior 10-year debt, according to prices in the secondary market on a trading platform operated by MarketAxess.
Barclays’ Common Equity Tier 1 ratio is expected to be at 12.1% by the end of next year, giving a 510bp buffer above the trigger level. Currently, Barclays’s Tier-1 ratio is 10.4%.
There are mixed views on the market about the CoCos. As this security is junior to equity, and weakens shareholders’ incentive to prevent excessive risk-taking by management. The Barclays deal’s T+603.7bp spread – about 300bp wider than existing Barclays Lower Tier 2 debt – was also a major attraction. Some institutional investors find CoCos are an acquired taste, arguing that their success is proof of a raging bull market.