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A not-so-safe bond

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November 19, 2012 – Comments (7)

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

7 Comments – Post Your Own

#1) On November 20, 2012 at 1:32 PM, Mega (99.97) wrote:

Wow, that's pretty interesting.  Can't say I agree with the investment grade ranking.

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#2) On November 20, 2012 at 1:46 PM, anchak (99.87) wrote:

Interesting Russ....what's Barclays current Tier I and how much of that is Euro Sovereign Treasury Securities?

 

Best

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#3) On November 20, 2012 at 1:49 PM, Mega (99.97) wrote:

The article quotes a fund manager as pointing out that it's junior to equity, nice point.

To me the concept would make more sense if it was a preferred stock, and had a sliding scale for principal value not just all or nothing. But maybe the market will like the simplicity of self-destruct bonds.

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#4) On November 20, 2012 at 2:11 PM, Mega (99.97) wrote:

If Tier 1 capital dips below 7% and then climbs back up, do the bonds resurrect?

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#5) On November 20, 2012 at 2:15 PM, anchak (99.87) wrote:

Megashort - looks like its a 10 yr bullet -- so would be at the end

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#6) On November 20, 2012 at 7:49 PM, rd80 (98.00) wrote:

what's Barclays current Tier I and how much of that is Euro Sovereign Treasury Securities?

I found conflicting information on that.  The last quarterly showed it around 11%, but it was under current rules.  Basel III changes that.  One report estimated it around 10% under the predicted new rules (those aren't out yet).  In other words, BCS is pretty well capitalized.  Not sure how much of the capital is tied up in euro sovereigns.

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#7) On November 20, 2012 at 7:54 PM, rd80 (98.00) wrote:

 If Tier 1 capital dips below 7% and then climbs back up, do the bonds resurrect?

I tried to find that, but couldn't find details on the bond terms.  This Reuters piece put out before the bonds were issued makes it sound like the trigger could occur any time and would not reverse.

There was quite a bit of demand for this thing, so I expect we'll see more like it and other creative structures before too much longer.

 

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