Cocos are gogo as buyers flood Barclays’ issue

Tim Wallace
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BARCLAYS’ groundbreaking new contingent convertible bonds – cocos – received an enthusiastic welcome from investors, in a very positive sign for the market as banks will have to increase issuance of the instruments.

The bank is raising $3bn (£1.89bn) in the 10-year instruments, with a face yield of 7.625 per cent. But with the final book reaching over $17bn by last night, the pricing should come in favourably for Barclays.

Cocos differ from usual bonds as they give the bank a boost when it gets into trouble.

In this instance, if Barclays’ common equity core tier one capital falls below seven per cent, the bondholders lose their investment to the bank, shoring up its financial position when it needs help most.

The hope is, this should never happen – when the CRD4 capital rules come in, probably by the middle of next year, Barclays will have to have capital of above nine per cent, two hundred basis points above the trigger point.

Analysts expect Barclays will have capital of above 12 per cent on this measure by the end of next year.

Still, the added risk means investors demand a higher rate of interest than for more senior debt, on which they are less likely to lose out. As banks have to increase their proportion of loss absorbing debt, this case is testing the waters for the industry.

It is only the 10th coco ever issued by a bank, and the third largest in the instruments’ short history. According to Dealogic figures, only Lloyds’ $11.5bn coco in 2009 and Credit Suisse’s $6bn issuance in 2011 are larger.

Deutsche Bank, Credit Suisse, Morgan Stanley, Barclays and Citi all ran the book, drumming up demand for the loans in a global roadshow series.