Barclays CoCo plan seeks to allay investor dilution threat
04/17/2013| 10:08am US/Eastern
Barclays (>> Barclays PLC) is seeking to head off any future row with shareholders about dilution of their holdings by proposing they get the right to buy shares if new instruments kick in that force debtholders to convert to equity.
Barclays (>> Barclays PLC) is seeking to head off any future row with shareholders about dilution of their holdings by proposing they get the right to buy shares if new instruments kick in that force debtholders to convert to equity.
Regulators are demanding that bondholders help strengthen a bank if its capital position weakens, which would provide greater protection for depositors and taxpayers. Banks are trying to develop the best structure for such debt.
Barclays in recent months has issued $4 billion (2.6 billion pounds) of contingent capital debt, whose value is wiped out if the bank's core capital ratio falls below 7 percent.
It has said it may issue 6 billion pounds more contingent debt, some of which could convert into ordinary shares in the event the ratio is breached, or contingent convertible debt (CoCos).
The bank will next week ask shareholders to approve this type of debt instrument.
Barclays said it intends to give them the opportunity to buy any shares from a conversion of debt to enable them to avoid dilution of their stakes. This would also offer an exit for bondholders who don't want to own shares, but it is not clear whether they would be forced to offer the shares.
The dilution issue is sensitive for Barclays, which provoked fury in 2008 when new Middle East backers invested in the bank on terms that many existing shareholders said was more attractive than they could get.
CoCos have been issued by other banks, but there is no standardised structure. How they will work at times of stress remains uncertain.
SHAREHOLDER GROUPS WARY
The Association of British Insurers (ABI) failed to give Barclays its backing for the new CoCos ahead of the vote by shareholders on April 25.
The ABI, whose members account for about 15 percent of the UK stock market, issued an "amber top" alert on the plan, people familiar with the matter said, which flags a contentious issue but stops short of recommending investors reject it.
The ABI said it was concerned that shareholders are not guaranteed the right to buy shares, which Barclays described as only an intention.
PIRC, another advisory group, said investors should abstain from the resolution and opposed a separate proposal by the bank that would allow debt to be issued that would not offer shareholders the chance to buy the shares.
"While the reason provided is understandable, the dilution involved for those shareholders not able to subscribe may significantly decrease their interest in the bank," PIRC said.
Barclays said issuing Cocos that convert to equity would give it flexibility, be more efficient and may give it more room to pay dividends.
Credit Suisse (>> Credit Suisse Group AG), UBS (>> UBS AG) and KBC (>> KBC GROEP) have also issued CoCos. Lloyds (>> Lloyds Banking Group PLC) sold 10 billion pounds of convertible bonds in 2009, but a hedge fund investor last year said the bonds were "expensive and uneconomic", underlining the wariness of mainstream investors toward hybrid securities.
PIRC also recommended that Barclays shareholders vote against its pay plan, saying its variable awards for executives are excessive, and opposed the re-election of John Sunderland, the head of the bank's remuneration committee.
04/17/2013| 10:08am US/Eastern
Barclays (>> Barclays PLC) is seeking to head off any future row with shareholders about dilution of their holdings by proposing they get the right to buy shares if new instruments kick in that force debtholders to convert to equity.
Barclays (>> Barclays PLC) is seeking to head off any future row with shareholders about dilution of their holdings by proposing they get the right to buy shares if new instruments kick in that force debtholders to convert to equity.
Regulators are demanding that bondholders help strengthen a bank if its capital position weakens, which would provide greater protection for depositors and taxpayers. Banks are trying to develop the best structure for such debt.
Barclays in recent months has issued $4 billion (2.6 billion pounds) of contingent capital debt, whose value is wiped out if the bank's core capital ratio falls below 7 percent.
It has said it may issue 6 billion pounds more contingent debt, some of which could convert into ordinary shares in the event the ratio is breached, or contingent convertible debt (CoCos).
The bank will next week ask shareholders to approve this type of debt instrument.
Barclays said it intends to give them the opportunity to buy any shares from a conversion of debt to enable them to avoid dilution of their stakes. This would also offer an exit for bondholders who don't want to own shares, but it is not clear whether they would be forced to offer the shares.
The dilution issue is sensitive for Barclays, which provoked fury in 2008 when new Middle East backers invested in the bank on terms that many existing shareholders said was more attractive than they could get.
CoCos have been issued by other banks, but there is no standardised structure. How they will work at times of stress remains uncertain.
SHAREHOLDER GROUPS WARY
The Association of British Insurers (ABI) failed to give Barclays its backing for the new CoCos ahead of the vote by shareholders on April 25.
The ABI, whose members account for about 15 percent of the UK stock market, issued an "amber top" alert on the plan, people familiar with the matter said, which flags a contentious issue but stops short of recommending investors reject it.
The ABI said it was concerned that shareholders are not guaranteed the right to buy shares, which Barclays described as only an intention.
PIRC, another advisory group, said investors should abstain from the resolution and opposed a separate proposal by the bank that would allow debt to be issued that would not offer shareholders the chance to buy the shares.
"While the reason provided is understandable, the dilution involved for those shareholders not able to subscribe may significantly decrease their interest in the bank," PIRC said.
Barclays said issuing Cocos that convert to equity would give it flexibility, be more efficient and may give it more room to pay dividends.
Credit Suisse (>> Credit Suisse Group AG), UBS (>> UBS AG) and KBC (>> KBC GROEP) have also issued CoCos. Lloyds (>> Lloyds Banking Group PLC) sold 10 billion pounds of convertible bonds in 2009, but a hedge fund investor last year said the bonds were "expensive and uneconomic", underlining the wariness of mainstream investors toward hybrid securities.
PIRC also recommended that Barclays shareholders vote against its pay plan, saying its variable awards for executives are excessive, and opposed the re-election of John Sunderland, the head of the bank's remuneration committee.
