Barclays Investors Swap Junior Bonds for $3.9 Billion CoCo Notes

Barclays Plc (BARC) is issuing about $3.9 billion of new contingent capital securities to replace junior notes as the U.K.’s second-largest lender adjusts its capital structure to meet regulatory requirements.

Investors agreed to swap securities in euros, dollars and pounds for additional Tier 1 notes in the same currencies, according to a statement. The new undated bonds will take the London-based lender’s issuance of the riskiest bank debt to $7.3 billion.

Banks are turning to additional Tier 1 bonds to boost capital levels as regulators enforce stricter rules to avoid taxpayer losses during a bank failure. The securities, which count as the capital lenders must hold against total assets, also save lenders money because interest is paid before tax.

“The exchange will help with their ratios,” said Simon Adamson, an analyst at CreditSights Inc. in London. “They didn’t have to do the exchange now but market conditions are good, so they might as well.”

Average yields on additional Tier 1 bonds and other contingent capital notes have declined to 5.9 percent from 6.3 percent when the exchange offer opened on May 15, according to Bank of America Merrill Lynch index data. The gauge fell to a record 5.8 percent on June 10.

European Issuance

European lenders have already issued about $42 billion of additional Tier 1 bonds since the market opened in April last year. The notes, which can be written down or be converted to equity in a crisis, allow issuers to remain in business because they have no due date and coupon payments are discretionary.

Barclays is issuing the new bonds through its holding company, replacing debt issued by both the holding and operating companies. This makes it easier for supervisors to wind up the lender in a crisis, according to Adamson.

“The operating companies could be left intact and regulators would avoid all the complicated cross-border issues,” he said. “The holding company has to have enough capital and debt to be written down to cover potential liabilities.”

Barclays is offering a coupon of 7 percent on the pound-denominated bonds, 6.625 percent on the dollar notes, and 6.5 percent on the euro portion, it said in a May 15 statement. That compares with an average coupon of about 7.3 percent for all additional Tier 1 debt sold since April 2013, according to data compiled by Bloomberg.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Jennifer Joan Lee, Michael Shanahan

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