More AT1 Refinancing

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Following on from the release of solid Q2 numbers, and no longer in a closed-period, Barclays were quickly out of the blocks and announced the issue of a new AT1 this morning; a $2bn transaction with initial price talk of 8%. We would not normally comment on run-of-the-mill fresh issuance, but this is interesting as Barclays has already satisfied its maximum AT1 bucket, and this forms part of the pre-financing of existing debt that is approaching its first call date. This approach mirrors that of BBVA, which earlier this year called its old 2013 vintage 9% AT1, and this move by Barclays further illustrates the intention of banks to roll this product, where feasible.

Pre-financing and then calling the mature AT1 issuance clearly satisfies most investors, who prefer to look to the first call-date as a proxy maturity date. In addition, and rather more subtly, it satisfies the regulator who introduced the concept of the AT1 product as an integral part of going concern capital. They need this product to work and be accepted by the investor community, and thus seeing a deal successfully roll helps to cement this product as a key component in fixed income portfolios.  The regulator also requires this type of debt to be permanent in nature, and without incentive to call. In addition, they do not want banks calling what is for them cheap debt and replacing it with more expensive debt. Conflicting with this, the banks know that by calling on the first call date, they create investor trust and the reward is cheaper financing, although at some point the cost of replacement is going to be higher than the cost of existing debt. Pre-financing allows the banks some degree of flexibility at call dates, because they can say that they have more AT1 outstanding than they need, and this becomes the reason for the call, rather than the fact that they can reissue more cheaply.

In summary, we see pre-financing as a strong positive for the sector, but we do know that some issues will ultimately be perpetual because the cost of pre-financing will just be too high, so it’s not quite as simple as it may seem! For the moment, since earlier deals came with good premiums, calling is easy for the banks.

For us the intention to call these transactions also helps create a yield curve for those banks with a number of outstanding AT1 issues, and for bonds with a relatively short timeframe to the first call, it creates a very strong pull to par. These issues should trade with substantially less volatility than they have exhibited in the past, which in itself is a key development for the AT1 market.

From a Barclays perspective this shows very prudent capital management, and a clear intention that they wish to continue supporting their bondholders in this important new capital product.