By Helene Durand
LONDON, Dec 5 (IFR) - Barclays paved the way for otherEuropean banks looking to raise Additional Tier 1 in the singlecurrency this week when it priced a heavily oversubscribedEUR1bn perpetual non-call seven-year issue.
Up until now, banks have relied heavily on the US dollarmarket to raise capital in this format, as it has offered thedeepest pool of liquidity and question marks remained around howdeep the demand would be in the euro market.
Banco Popular Espanol is the only issuer to have gone toeuros, printing a EUR500m perpetual non-call five-year thatattracted a book in excess of EUR1.5bn, although the issuer hadto rely heavily on hedge funds to get the deal away.
For Barclays, however, the book on the trade reachedEUR12bn, laying to rest any doubts about investor demand.
"We are seeing a gradual increase in the acceptance of thisasset class across different investor types," said DanielFairclough, managing director, UK financial institutions, atBarclays.
"As is inevitable with any new product, this has taken time,but it's pleasing to see strong evidence of European real moneyinvolvement."
Fairclough added that being able to offer loss absorptionthrough equity conversion had helped bring European investors tothis market.
Barclays was keen to capitalise on the momentum of itsUSD2bn perpetual non-call five-year Additional Tier 1 tradepriced in November.
"The success of the deal justifies our decision to tap intothe momentum we had built during the extensive global roadshowcompleted for the dollar trade," said Steve Penketh, managingdirector, group treasury at Barclays.
Because it had explained all the various features of thedeal for the dollar trade, Barclays was able to undertake theeuro deal without having to conduct an extensive roadshow.
Having gone out at mid-to-low 8% area, guidance was refinedto 8%-8.125%, for final pricing at 8%.
This was 25bp tighter that the dollar on a coupon basis,although this does not take into account the cross-currency swapand the fact that the dollar had performed very well in thesecondary market. However, the call date on the euro transactionis two years later.
The strong performance of the new euro trade led marketparticipants to say that Barclays had been very generous.
"They left a lot on the table and this traded up by threepoints, which tells you that it was cheap," said a banker.
Another said that while it was clear it was a strategicdeal, the rally was substantial. "Having said that, it's a greatdeal for the market."
Barclays' Penketh said the bank's strategy had helped tosupport a still-developing and critical asset class for theEuropean banking sector.
"Trying to shave an eighth off here or there on pricingmisses the point. In a developing asset class, there is alwaysan element of price discovery. Fair value is the target - theright calibrated balance for issuers and investors. Being tooaggressive on pricing risks stifling the asset class before itgets off the ground."
Given that Barclays has said it needs to raise GBP6.6bn inthe format, it is not surprising that it wanted to keep theinvestor base sweet.
This deal fulfils Barclays' objective of raising up toGBP2bn of CRDIV-qualifying Additional Tier 1 securities with a7% fully loaded Core Equity Tier 1 ratio trigger, announced aspart of its leverage plan on July 30 2013. The deal convertsinto equity if the bank breaches that ratio.
The 7% fully loaded trigger excludes Barclays' GBP7.6bnloss-absorbing cushion of goodwill capital. Just like Barclays'dollar Additional Tier 1 issue, coupons are non-cumulative,deferrable and there are no dividend pushers or stoppers.
The firm estimates that the capital cushion that protectsinvestors from potentially having coupon payments suspendedwill shrink from GBP15bn in 2016 to GBP7bn in 2019 as highercapital requirements kick in.
This is because the level at which Barclays becomes subjectto additional restrictions on making coupon payments will beraised from 7% CET1 to 9%.
Fund managers took 61%, hedge funds 21%, private banks 9%,insurance/pension funds 5%, banks 2% and others 2%.
The UK/Ireland accounted for 49%, the US 13%, Asia 11%,France/Benelux 8%, Switzerland 6%, Southern Europe 6%, theNordics 5% and Germany/Austria 2%.
Barclays was sole bookrunner, while Bank of America MerrillLynch, BNP Paribas, Commerzbank, Credit Agricole CIB, CreditSuisse and Morgan Stanley were joint leads. The transaction israted B+/BB+ by S&P/Fitch.
Barclays (BARC)