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January 14, 2013 5:12 pm
KBC, the Belgian financial group that received €7bn in state aid in 2009, is poised to follow Barclays’ example and issue a bond with a permanent writedown feature under which investors could lose their money even if the bank stays in business.
The lender, which has previously said it wants to raise up to €750m in contingent convertible bonds this quarter, has started marketing a coco-style dollar issue to investors in Asia and Europe.
KBC recently announced a number of disposals and last month sold €1.25bn of shares as part of its efforts to repay €3bn borrowed from the Belgian federal government when the bank ran into difficulties in the last crisis. The bank also took aid from the Flemish government – which governs the Dutch-speaking northern part of Belgium.
The KBC bond mimics the structure of last year’s $3bn contingent capital issue by Barclays – a deal that was criticised for being investor unfriendly but which drew a huge orderbook and has been trading well in secondary markets recently.
Both the KBC and Barclays issues differ from the type of cocos that were developed after the 2007-08 crisis for banks such as Lloyds to boost capital, which were designed to convert to equity should a pre-agreed financial trigger be breached.
The KBC bond, like the Barclays’ issue, permanently writes down to zero if the bank’s common equity tier 1 ratio falls below 7 per cent, meaning bondholders could lose everything even as the business remained a going concern.
However, the issue could prove attractive in the current low rate environment, with many investors hunting for higher yielding assets.
“It may be harder to achieve outsize returns in fixed income in the future than it has been in the recent past with bond yields being so low. It’s difficult for investors to find good assets with coupons in excess of 5 per cent,” said Andy Young, head of the financial institutions syndicate at Credit Suisse.
The issue is being managed by Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, JPMorgan, KBC and Morgan Stanley.
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