Barclays spent well over a year speaking to regulators and investors about its options for contingent capital. It then spent an intensive six days on the road marketing a tier two note that carries risk of permanent write-down should the bank breach a 7% common equity ratio.
But despite that intense preparation, the deal slumped in secondary markets. At the end of last week, amid heavy trading, it sagged below par. It has improved since then, but was still around 99.5 on Tuesday afternoon.
Given that the deal enjoyed $17bn of orders, it seems counterintuitive for it to have sunk as low as 98 in the days after pricing. lt was carefully allocated, with orders from Asian accounts — who bankers say often inflate orders for new issues as book sizes grow — heavily cut back.
One theory is that the long term holders of such paper are much more limited than the 550 accounts that placed orders for the deal in primary. Many in the book may just have been along for the ride, hoping to flip the bond at a profit in secondary trading. But that seems unlikely given the hundreds of investors that turned up to the roadshow.
Maybe the oversubscription worked against the issuer, as the leads had to cut back orders severely. An account that received $1m of the paper — instead of the $5m it asked for — may simply have decided that the monitoring, compliance and back office responsibilities involved with the stake were not worth it if it couldn't have decent size.
That buyer might of course try to add to the position. But equally, it might opt to get out altogether.
Congestion
Market dynamics also played a role. Prudential Financial sold a $1.5bn subordinated 30 year deal on the same day that Barclays was in the market. Even in last week’s bull market, $4.5bn of subordinated paper is a lot to digest. A sell-off in equities in the days after pricing spurred selling. And once the bond was underwater, others rushed to drop their notes as well.
UBS’s debut of tier two contingent capital instruments in February met a similar fate. The Swiss bank was particularly unlucky, hit by a Moody’s downgrade during execution, which led the note to suffer in secondary trading. But now the bond now trades above par.
All of which means the aftermarket performance of Barclays’ Coco must be put into perspective. The demand it drew, particularly the numbers of accounts involved, highlights that investors are at least interested in innovative new instruments. Where it trades in two months’ time will show us the real long-term appetite for this kind of deal.