LONDON – Barclays is considering asking its shareholders for approval to sell bonds that would convert into shares if the British bank hits trouble, a person close to the matter said on Monday.
The bonds would help the bank to meet tougher demands from regulators, requiring banks to hold more capital to safeguard taxpayers. A slice of this additional cushion can be accounted for with contingent capital bonds or other hybrid capital. Barclays could issue as much as 7 billion pounds ($10.7 billion) of contingent capital bonds, known as CoCos, which allow banks to shore up their balance sheets if their finances weaken significantly.
The bank, which raised $3 billion through a similar bond sale in November, could ask for approval from shareholders at its annual meeting on April 25, said the source, who declined to be named because proposals for the meeting have not been finalized.
Barclays would need approval from investors because existing shareholdings could be diluted if it were to sell a significant amount of bonds that convert into shares if its core capital ratio falls below a certain level.
The bank declined to comment, but it may prefer to stick with the structure used in November, selling bonds that are wiped out - rather than being converted into shares - if its core capital ratio falls below 7 percent.
Britain's Financial Services Authority took a hard line on the structure of November's deal, requiring a "high trigger" to ensure that Barclays rebuilds its capital early if its balance sheet deteriorates.
Chief Executive Antony Jenkins told analysts when he set out his strategy two weeks ago that he plans to build contingent capital "over the next few years" and expects loss-absorbing capital instruments to cover about 2 percent of its risk-weighted assets (RWAs).
RWAs are a bank's assets, usually loans, adjusted for the likelihood of non-payment and are a key determinant of a bank's capital requirements.
Jenkins expects RWAs to be about 440 billion pounds in 2015, implying contingent capital needs of almost 9 billion pounds.
The Sunday Telegraph newspaper said on Sunday that Barclays would sell up to 3 billion pounds of CoCos in early May if it gains approval from shareholders.
The greater risk attached to contingent bonds means that they are more costly to issue. Barclays is paying annual interest of 7.625 percent on the bonds it issued last year, which have a 10-year maturity.
That offer attracted $17 billion of demand, despite concern that the high trigger level would deter prospective buyers. ($1 = 0.6551 British pounds)
(Reporting by Steve Slater; Editing by David Goodman)