Barclays Capital's September deal marks the first placing of the innovative Tier One Notes (Tons) structure in the US market. The AA rated perpetual yankee issue with a 30-year call option had a 6.86% coupon and was priced at 215 basis points over 30-year US treasuries. If the deal is not called after 30 years its coupon will be transformed into floating-rate Libor plus 1.73%. Any coupon repayment after the call date will have to be made via the Alternative Coupon Settlement Mechanism (ACSM). The ACSM is a method of funding coupon payments through share issuance. The trustee sells shares and distributes the cash proceeds to the securities holders. The ACSM is used to ensure that investors will be guaranteed the full amount due in perpetuity.
The unusual Tons structure used in the deal is a development of Barclays Capital's popular Reserve Capital Instrument (RCI) product that was first launched by Barclays Capital in June 2002. It is pioneering because it gives banks a more cost effective way of raising core tier-one capital. The deal achieved a 15bp premium over what could have been achieved with the RCI structure.
Tons are a breakthrough because they are a new class of non-equity securities that qualify as core tier-one capital, are directly issued, are tax deductible, and are not considered to be hybrid.