- Barclays PLC (“Barclays”) recently issued a 10.5 years subordinated tier 2 AUD bond, BACR 6.158% 28May2035 Corp (AUD), with initial pricing guidance of 6.4125% (Australia 3-Month Bank Bill Swap Rate + 225bps area). The proceeds are used for general corporate purposes and further strengthening the capital base.
- The issuer’s credit rating is BBB+ / A (S&P / Fitch), and the bond credit rating is BBB- / BBB+ (S&P / Fitch). The bond is callable on or after 28 May 2030 (5.5 years from the issue date) at par value, with a fixed-to-float feature. The coupon rate will be reset quarterly on or after 28 May 2030, based on Australia 3-Month Bank Bill Swap Rate plus 2% spread. The coupon payment frequency will be changed from semi-annually to quarterly.
- Barclays PLC (“Barclays”) is a British multinational bank, primarily operating in the United Kingdom although its footprints can be found across the globe. Recognised as a systemically important bank by the Financial Stability Board, its long history traces back to the 1600s.
- Barclays’ performance had been more resilient than initially expected, particularly amidst the downward pressure on interest rates. Comparing quarter-on-quarter, net interest income in 3Q24 grew by +2% YoY against 3Q23, contributed by slower rate cuts than expected in the UK alongside Barclays’ considerable structural hedge position.
- The Group’s asset quality stood mostly stable, with the Group’s loan loss rate standing at 37 bps – below Barclays’ expectation of 50 to 60 bps through the cycle. Barclays’ US Consumer Bank (“USCB”) segment contributes the majority of the Group’s credit impairment charge (about ~70%). With that said, loan losses at USCB have begun stabilising and are expected to average slightly lower across FY24 to FY26.
- Barclays’ solvency and liquidity remains highly decent, with the Common Equity Tier 1 (“CET1”) ratio improving across the quarter from 13.4% in 2Q24 to 13.8% in 3Q24. The increase in the CET1 ratio was contributed by capital gains from attributable profits and a decline in risk-weighted assets, offset by dividends and other impacts. Meanwhile, the liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”) stand at 170.1% and 135.6% respectively, both of which are above the regulatory requirements of 100%.
- We would like to highlight the risk on tier 2 issuance, which for BACR 6.158% 28May2035 Corp (AUD), there is the loss absorption feature in place that could result in write-down at the point of non-viability. The risk involved might not be suitable for all investors.
- Since the bond is callable in 5.5 years time (28 May 2030), we note that the issuer is incentivised to redeem tier 2 issuance on their first call date, as Tier 2 capital would have to be amortised past the first call date.
- The bond will be available on Bond Express with a projected yield to maturity of around 6.2% and yield to next call of around 6.0%, which is around 210bps and 190bps over the 5Y cash rate set by the Reserve Bank of Australia (RBA).
- This makes it a good option for investors seeking AUD bonds with a higher yield, but investors have to take note of the fixed to float feature, the non-call risk and the tier 2 loss absorption feature.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds position in BACR 6.158% 28May2035 Corp (AUD) and the analyst who produced this report hold a NIL position in the abovementioned securities.
