Bloomberg News

Barclays Raises $3 Billion With 10-Year Contingent Capital Notes

November 14, 2012

Barclays Opens Sale of Contingent Notes to Boost Bank’s Capital

A logo sits above the entrance to the Barclays Plc headquarters in London. Photographer: Chris Ratcliffe/Bloomberg

Barclays Plc (BARC) raised $3 billion from a sale of dollar-denominated bonds that can be written off in a crisis as the U.K.’s second-largest lender seeks to meet regulators’ demands to bolster capital.

Investors in the 10-year contingent capital notes will lose all their money if Barclays incurs losses that reduce its so- called core Tier 1 equity to 7 percent or lower, according to two people with knowledge of the sale who asked not to be identified because they’re not authorized to speak about the deal. The 7.625 percent bonds yield 603.7 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

“There’s huge demand for yield from Asian retail,” said Steve Hussey, a credit analyst at AllianceBernstein Ltd. in London. “Barclays is using that as an insurance policy to get this done.”

Bonds designed to absorb losses before a lender collapses are a product of the 2008 financial-sector crisis, when debt investors were made good while banks had to be propped up by governments to prevent contagion to the wider economy. Standard & Poor’s said the Barclays notes raised “going-concern” capital for the bank, designed to keep the lender in business as it seeks money to recover.

Asian Investors

Asian investors accounted for about half of the order book as the U.S. opened, said the people with knowledge of the deal.

The British lender managed the transaction itself, along with Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and Morgan Stanley.

Until the write-off is triggered, the subordinated bonds are so-called lower Tier 2 capital on which 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.

John McGuinness, a spokesman for Barclays in London, declined to comment.

The cost of insuring Barclays’s senior debt has risen for the past six days in anticipation of the contingent note sale. Credit-default swaps protecting the bank’s securities for five years cost 179 basis points, up from 157 on Nov. 5, the day news of the financing emerged, according to prices compiled by Bloomberg.

Credit-default swaps on Barclays were the most traded contracts tied to companies included in European derivatives indexes in the week through Nov. 9, up from 28th place the week before, according to the Depository Trust & Clearing Corp.

Credit swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

S&P said Nov. 9 it expects to rate the Barclays contingent notes BBB-, the lowest investment-grade level and four steps below the A rating of the U.K. lender’s holding company.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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