Barclays scores a TON

Barclays Capital last month widened the expanse of the subordinated bank market with the introduction of Tier One Notes (TONs), a new form of core tier-one capital.

Barclays Bank launched a £400m perpetual issue callable in 2032 with a semi-annual 6% coupon on June 14. Bonds were re-offered at Libor plus 120bps, says Avery, a premium of only 10bps-15bps over where a new Barclay’s sterling RCI would be expected to price.

“TONs are the only tier-one structure in the market,” says Avery. “In respect of the Barclays TON issue, it is the only chance investors have to get exposure to the Barclays name in tier one in sterling. If you examine the risk profile of TONs versus RCIs and you are happy with the credit fundamentals of an institution, then investors will always take the highest-yielding form of that name – in Barclays’ case – TONs.”

TONs are similar in structure to Barclays’ innovative tier-one Reserve Capital Instruments (RCI), says Paul Avery, director in the financial institutions group at Barclays Capital, but are not a substitute for RCIs. But stricter regulations for core capital disallow a coupon step-up and if the issue is not called on the first call date, the coupon resets to six-month sterling Libor plus 89bp.

Coupon payments after the first call date can only be settled via the Alternative Coupon Settlement Mechanism (ACSM) that funds the coupon payment by the issuance and sale of shares for cash. Deferred coupons can only be settled on redemption via the ACSM and are lost in liquidation.

The Inland Revenue has established that the coupons will be tax-deductible and the Financial Services Authority (FSA) has confirmed that TONs qualify as core tier-one capital and will not be subject to the regulatory 15% limit on ‘innovative’ capital.

“This will give banks an additional 10%-15% of capital,” adds Avery, “substantially cheaper than equity capital; therefore TONs allow a bank to save money by reducing its cost of capital. As most UK banks are at or close to the FSA’s 15% limit on hybrid tier one, this will lead to significant issuance.”