November 6, 2012 5:22 pm

Barclays poised to sell ‘cocos’ abroad

Barclays is looking to sell contingent convertible bonds to investors around the world in the first such transaction from a British financial institution since UK regulators asked lenders to boost capital buffers.

The issue will provide a further test for so-called “coco” bonds and offer another indication of how much market conditions for issuers have improved in the wake of action by the European Central Bank to ease concerns over a eurozone break-up.

Cocos, which convert to equity once a pre-agreed financial trigger is breached, were developed after the 2007-08 financial crisis as a way for banks to boost their capital. In the UK, Lloyds Banking Group issued cocos as part of its recapitalisation plans a few years ago, while Yorkshire Building Society issued cocos as part of its takeover of Chelsea Building Society.

However, the product is increasingly being seen as a good way for banks to meet capital requirements under new Basel III regulations.

Swiss banks, led by Credit Suisse, have issued cocos as part of their efforts to meet tough capital standards set by Swiss regulator. Under these, banks in the country must hit a total capital ratio, a measure of balance sheet strength, of 19 per cent by 2019, much higher than the 10 per cent to be required under Basel III rules.

However, other European banks have been reluctant to issue cocos until they receive greater regulatory clarity on how the instruments will be treated under the capital requirements directive IV, the way the EU will implement Basel III into European law.

Barclays’ move comes after recent comments from the Bank of England and the Financial Services Authority have given UK banks greater clarity on how much loss-absorbing capital they should hold.

The BoE’s Financial Policy Committee said in minutes released in September that banks should “supplement internal capital generation by seeking opportunities to raise capital externally. . . with the options including debt conversion and the issuance of suitable contingent capital instruments as well as conventional equity”.

Last month Andrew Bailey, the FSA’s executive in charge of supervising banks, said in a speech to the British Bankers’ Association that he found cocos an attractive instrument that could help banks increase their capital buffers.

The Barclays deal is being promoted to investors in Asia, Europe and the US over the next week or so.

Barclays is global co-ordinating bookrunner and structuring adviser on the deal, while Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley are joint bookrunners.

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