Last week Barclays issued US$3bn of new contingent capital notes. The securities were marketed globally and were significantly over-subscribed attracting orders of more than US$17bn, with most coming from Asian investors chasing high yield.
The notes are a 10-year security which if Barclays core Tier 1 (CET1) capital falls to 7% or lower, will automatically be transferred to the bank for nil consideration. In other words, investors lose all their investment if the trigger is met. There will be no ‘point of non-viability’ language, meaning the write-down will be triggered solely by the CET1 and not by the FSA deciding the bank is not viable. Currently Barclays estimates a CET1 transitional of 9.1% or 8.2% ‘fully loaded’ by 1 January 2013.
The notes were priced at 7.625% (603.7bps over Treasuries). Interest can’t be deferred or skipped. Barclays can repay the bonds if regulators deem the securities can’t be treated as capital or if the tax treatment changes.
The price contrasts with that of ABN Amro NV’s €1bn 7.125% notes due 2022. While both form part of the issuer’s Tier 2 capital, ABN Amro’s are less risky than Barclays’s, because they don’t have the 100% write-down feature. That’s reflected in S&P’s BBB+ rating, against BBB-, two steps lower, for the Barclays note.
S&P called the Barclays notes “going-concern” capital, designed to keep the lender in business as it seeks money to recover. Bonds designed to absorb losses before a lender collapses are a product of the 2008 financial-sector crisis, when debt investors were protected while banks had to be propped up by governments/tax payers to prevent contagion to the wider economy.