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* UK bank attracts US$10bn of orders for Additional Tier 1bond
* European issuers look to put dent in EUR600bn capital pile
* Market praises Barclays for careful execution
By Aimee Donnellan
LONDON, Nov 15 (IFR) - A high-risk jumbo CoCo sold byBarclays this week has revealed the deep pockets of the USinvestor base and opened the door for other European banks tobegin tackling the EUR600bn capital pile that needs to be raisedin the coming years.
The first Additional Tier 1 bond to target the US investorbase had a lot riding on it. Barclays needs to raise a furtherUS$1.25bn before June next year, European banks are coming underincreasing pressure to boost their leverage ratios, and placingthese instruments in the US market remains the cheapest option.
The market for these new-style hybrid bonds could grow to atleast EUR450-600bn in Europe and US$400-500bn in the US,according to estimates by Citigroup.
"This is a very important trade for Barclays and other UKbanks as it highlights the demand for equity convertiblestructures from the US investor base," said Peter Jurdjevic,head of balance sheet solutions at Barclays.
Barclays' own syndicate team, along with Citigroup, DeutscheBank, Goldman Sachs, SMBC Nikko, UBS and Wells Fargo sold theSEC-registered deal mainly to US accounts.
Investors will receive an 8.25% coupon as a reward for therisks, which include being converted into equity should thebank's fully-loaded Core Tier 1 ratio fall below 7%, as well ascoupons not being paid at all and being lost forever.
The 7% fully-loaded trigger excludes Barclays' GBP7.6bnloss-absorbing cushion of goodwill capital and is moreaggressive than previous CoCo trades.
The deal's pricing and USD10bn order book should encourageother potential issuers into the market, which has already seenAT1 dollar bonds from Societe Generale and BBVA in Reg S formatand a euro trade from Banco Popular Espanol.
"The fact that we have had a range of deals including aSpanish bank issue in the AT1 market, and now Barclays with afully loaded high trigger instrument, shows the development ofthe market and will provide important pricing references forothers seeking to access the space," said Mark Geller, head ofEuropean financial institutions syndicate at Barclays.
RAISE THOSE RATIOS
Global regulators have taken a more aggressive approach toforce banks to clamp down on leverage - a measure of risk thatregulators have recently brought into focus - and are allowingissuers to use Additional Tier 1 bonds to meet some of thoserequirements.
In the case of Barclays, the bank has been set a 3% leverageratio target by the UK regulator which it needs to hit by June2014. That ratio remained at 2.2% in the third quarter, eventhough the bank shed more than EUR100bn of assets and completeda GBP5.95bn rights issue.
Luckily for Barclays and other issuers of deeplysubordinated debt, the market backdrop is incredibly supportive.
Yields have been falling across the bank capital spectrum inrecent months, pushing investors into riskier securities.
Added to that, the cost of insuring subordinated bank debthas tightened throughout the course of the year, which in turnhas driven down the coupons banks have to pay on theseinstruments.
But despite optimal market conditions, Additional Tier 1 isfar from an easy sell. Coupon deferrals and a fully loaded hightrigger are just some of the features Barclays had to include inits latest transaction to meet the UK's Prudential RegulationAuthority and CRD IV requirements.
"The big worry for this transaction and ones like it is thecoupon deferral risk," said Dierk Brandenburg, a senior bankcredit analyst at Fidelity.
"The coupons are subordinated to the previous CoCos, but inthis case you are slightly better off because you are gettingequity instead of being written down to nothing if Barclays hitsits trigger."
But US fund managers showed up in force - evidence, bankerssay, that the market is maturing.
"Barclays has taken the whole market a step further withthis transaction," said Simon McGeary, head of new products,EMEA, at Citigroup.
"They had grown up conversations with a new investor base,clearly set out the risks and mitigants for investors and havebeen rewarded for their efforts."
Barclays decided not to tighten pricing from initialthoughts in the low 8% range, setting final terms at 8.25% forwhat was a modestly sized USD2bn deal given the hefty level oforders.
"We deliberately determined to price the security toperform in the secondary market as a quid pro quo for the trustand loyalty showed by our principal investors who are vital inensuring the development of this important asset class," saidSteven Penketh, managing director at Barclays Bank.
The deal's success - bonds have traded up two points -should help the bank's next issue, and other borrowers'offerings too.
"The placement of this bond with a mixture of US, Europeanand Asian real money accounts with a bit of hedge fund supportwill assist its liquidity and stability in the future and showother issuers the kinds of investors they can sell theseinstruments to," said Alexandra MacMahon, head of EMEA FIG debtcapital markets at Citigroup.
