A not-so-safe bond
November 19, 2012
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Barclays had some interesting paper mixed in with last week's new bond issues. The $3 billion, 10-year carries an invesment grade rating, but has a coupon rate that looks more like junk. The extra risk premium is because the new bond is a contingent issue - if Barclays Tier-1 ratio fall below 7%, the bonds go to zero. Not zero coupon, zero value. There's a decent cushion between the current ratio and the trigger point, but still... It isn't unusual to find contingent convertible, or CoCo, bonds that convert to equity based on some trigger event, but contingent busted is pretty rare. Reuters has a good write-up on the issue if anyone wants more information. The really fascinating part is that they found plenty of buyers for this stuff at a 7.65% yield. The risk may be low, but here's a little musical description of what could happen to those bondholders in another financial crunch.
In addition to Barclays, Eaton, Principal Financial and National Oilwell Varco borrowed to finance acquisitions, Statoil didn't say much about what it was borrowing for and Viacom rolled out a $250 million dollar issue that could grow by as much as $2 billion with an associated debt swap.
Disclosure: No position in any security mentioned.
Russ
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