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By Aimee Donnellan and Steve Slater
LONDON, Feb 25 (IFR/Reuters) - Barclays and RoyalBank of Scotland are planning to raise more capital viabonds that convert into shares in times of crisis, to help meetsafeguards for taxpayers that are being demanded by regulators.
British bank Barclays could issue up to 7 billion pounds($11 billion) in so-called contingent convertibles, or CoCos,people close to the matter said on Monday, adding to the 3billion it raised in November.
The bank could ask for shareholder approval at its annualmeeting on April 25, said a source, who declined to be namedbecause proposals for the meeting have not been finalised.
Meanwhile, 82 percent government-owned RBS will this weekflag it could issue CoCos.
While RBS has previously steered clear of the hybridfinancial instruments whose value has elements of debt andequity, the Financial Services Authority - Britain's financialwatchdog - has been encouraging banks to build capital buffersthrough CoCos, a source close to the situation said.
If banks want to issue a significant amount of CoCos, whichconvert into shares when their core capital ratio falls below acertain level, they need shareholder approval because it couldbe dilutive for existing shareholdings.
Barclays and RBS declined to comment.
How the banks structure any deals is unclear - there is nostandard structure for CoCos.
Barclays may prefer to stick with the structure used inNovember, selling bonds whose value is written down to zero -rather than being converted into shares - if its core capitalratio falls below 7 percent.
Lloyds Banking Group sold 10 billion pounds ofconvertible bonds as part of a 25 billion pound recapitalisationplan in 2009. A high-profile hedge fund said last year the bondswere "expensive and uneconomic", underlining the wariness ofmainstream investors about hybrid securities.
The FSA took a hard line on the structure of the deal byBarclays in November, requiring a "high trigger" to ensure itwill rebuild capital early if its balance sheet deteriorates.
Chief executive Antony Jenkins told analysts when he set outhis strategy two weeks ago he planned to build contingentcapital "over the next few years" and expected loss-absorbingcapital instruments to cover about 2 percent of the bank'srisk-weighted assets (RWAs).
RWAs are assets, usually loans, adjusted for the likelihoodof non-payment, and are a key determinant of a bank's capitalrequirements.
Jenkins expects RWAs to be about 440 billion pounds in 2015,implying contingent capital needs of 9 billion pounds.
The Sunday Telegraph newspaper reported that Barclays wouldsell up to 3 billion pounds of CoCos in May if it got approvalfrom shareholders.
The greater risk attached to CoCos comes at a cost. Barclaysis paying 7.625 percent interest on the 10-year bonds issued inNovember. That offer attracted $17 billion of demand, despiteconcern that the high trigger level would deter buyers.
