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LONDON, Nov 7 (IFR/Reuters) - Britain's financial regulator is taking a hard line on a type of debt being sold by Barclays (BARC.L) to protect its capital position, as bondholders will be wiped out if the bank's core capital ratio falls below 7 percent.
That is regarded as a high "trigger" point for so-called "contingent capital" (CoCo) bonds, which allow banks to shore up their balance sheets if their finances significantly weaken, and could increase the interest rate Barclays has to pay on the bonds to attract investors.
The bonds will be wiped out if Barclays' core Tier 1 capital falls below 7 percent of its risk-weighted assets and will not - as is the case with some CoCo bonds - be converted into shares, according to the preliminary prospectus of the issue reported by IFR, a Thomson Reuters publication.
The prospectus follows a long period of negotiations between Barclays and the Financial Services Authority (FSA).
Regulators are requiring banks to strengthen their capital positions to prevent a repeat of the 2008 financial crisis, when several had to be bailed out by taxpayers.
The Swiss regulator has given Credit Suisse CSGN.VX and UBS UBSN.VX a choice of triggers at 5 percent and 7 percent for CoCo bonds, allowing them to decide whether to pay a higher interest rate or not.
"We're in a fairly favourable window and there should be reasonable demand, but the 7 percent trigger is going to be the most difficult part of this to sell," said CreditSights analyst Simon Adamson of the Barclays issue.
"What investors will have to look at is the probability of Barclays losing that much capital that it risks triggering it."
After several false starts, Barclays is optimistic it can sell the CoCos. Finance Director Chris Lucas said last week it had made progress in getting agreement with the FSA, and he is leading a roadshow to attract investors currently underway. The details of the issue will be set once the roadshow ends.
Barclays plans to launch the issue this month, and the bonds will have a maturity of 10 years. The offer is likely to be denominated in U.S. dollars and the bank could look to sell about $2 billion of the bonds, analysts and bankers said.
U.S. and Asian institutions, private banking clients and hedge funds are seen as the most likely buyers. Many European insurers, pension funds and other traditional debt buyers appear cautious about the higher risk, higher return product.
Barclays may have to offer an interest rate of around 7-7.25 percent on the offer, Adamson said.
Barclays had core Tier 1 capital of 11.2 percent of its risk-weighted assets at the end of September, although that ratio would drop to 8.2 percent if tougher new Basel III capital rules were applied.
It will have to hold core capital of 9 percent based on new global rules and a surcharge as a big bank, and estimates the ratio would be 10.4 percent on a full Basel III basis at the end of next year, giving it a comfortable cushion.
Issuance of CoCo deals up to now have been sporadic, led Credit Suisse and UBS and topped up by isolated issues by Lloyds (LLOY.L) and Rabobank. Key issues that surround any CoCo issues are at what point it converts into equity, the interest the bank pays and the position of CoCos in the capital structure.
Reporting by Steve Slater at Reuters and Helene Durand at IFR; Editing by Mark Potter