By Owen Sanderson
LONDON, Sept 5 (IFR) - Barclays could lose the regulatorybenefit from its contingent capital notes if the PRA takes amore a stringent line on Pillar 2 capital, which could lead tothe notes being called early or being the subject of a liabilitymanagement exercise, according to research from BNP Paribas.
The Prudential Regulatory Authority is proposing that firmsshould meet Pillar 2A capital requirements (for risks notcaptured or not fully captured under the CRR) with at least 56%Common Equity Tier 1 from January 2015. It is consulting onwhether to increase this to 100% by January 2016.
Right now, any bank capital can be used to meet these needs,but Common Equity Tier 1 (CET1) is the tightest definition ofbank capital and excludes all hybrids in debt hosts.
The PRA acknowledges that "this change may increase the costof capital for some firms to the extent that existing, voluntarycapital buffers are not of sufficient quality to support Pillar2A".
If these rules are put in place and the Barclays notes arenot grandfathered, then "they no longer qualify for Pillar 2 andbecome just relatively expensive Tier 2 for Pillar 1 for whichloss absorption in the T&Cs is not required", according to theBNP Paribas analysts.
HSBC's EUR1.5bn Tier 2, for example, was priced at mid-swpasplus 195bp on Tuesday (3.375% coupon, 99.878 reoffer price),while Barclays paid 7.75% for its USD1bn T2 Coco in April.
The Barclays notes have a regulatory call event in place,allowing redemption at par if they fully lose Tier 2 status(subject to prior regulatory approval). However, losing Pillar 2status would not trigger this event.
"If [the bonds no longer qualify], we would imagine thatBarclays would likely want to do a liability management on theseinstruments, potentially as an exchange into AT1s, but notnecessarily," said the analysts.
Barclays declined to comment.
The report from BNPP also considers the impact on Lloyds'ECNs in the same scenario. These bonds are Lower Tier 2, but incontrast to the Barclays notes, have a call at par for loss ofPillar 2 status "if ECNs lose either Tier 2 status under Pillar1 or CT1 status under Pillar 2".
The BNP Paribas analysts say that they do not expect a callat par, since the ECNs are trading over par (the most liquidnotes at 103.40, some in 105-107 area), and Lloyds would want topreserve its reputation in the market.