• Notes gain while shares drop most since 2012 on lower payouts
  • Banks boost capital ratios as new rules increase bond risks

Barclays Plc Chief Executive Officer Jes Staley’s turnaround plan is reassuring debt investors even as shareholders run for the exit.

The bank’s riskiest bonds rose on Tuesday, and the cost of insuring its debt against default tumbled, after Staley announced steps to boost capital levels, including reducing a stake in an African unit and cutting dividends. The gains contrasted with a slump of as much as 11 percent in the London-based lender’s stock, the biggest decline in more than three years.

“As bondholders, we don’t care so much about what shareholders care about,” said Francois Lavier, who oversees $3.4 billion of bank debt at Lazard Freres Gestion in Paris. “The question for us is: are we invested in a bank which is profitable and able to increase its level of capital?”

Bond investors are focusing on banks’ capital levels as new regulations increase the chances of them suffering losses if a lender runs into trouble. That heightened risk is denting demand for bank debt and forcing lenders such as Barclays and Deutsche Bank AG to shore up capital to maintain access to bond markets, even if it means disgruntled shareholders.

Capital Ratio

Barclays said cutting dividends and its sake in the Africa unit will help boost the common equity Tier 1 ratio by at least a percentage point. The measure was 11.4 percent at the end of 2015, up from 10.3 percent a year earlier. Banks can be prevented from making payments on additional Tier 1 notes, the riskiest debt securities, if capital ratios fall too low.

Barclays’ 1.1 billion euros ($1.2 billion) of additional tier 1 bonds rose 2 cents on the euro to 86 cents, the highest since Feb. 23, according to data compiled by Bloomberg.

That’s still down from 101 cents at the start of the year, following a marketwide rout in banks’ contingent convertible notes caused by greater nervousness about the risks embedded in these types of bonds. Barclays and Deutsche Bank notes were among those that fell the most.

Barclays cut its dividend to 3 pence per share for 2016 and 2017 from 6.5 pence last year. That helped push the stock to as low as 152.80 pence in London trading. The shares have dropped 21 percent this year.

“There’s a divergence between the Barclays equity and debt stories,” said Paul Dilworth, an investment manager at Kames Capital Plc, an Edinburgh-based fixed-income firm that oversees about 55 billion pounds ($77 billion) including Barclays bonds. “They’re clearly now on two different trajectories.”

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