![]() ![]() H.K.: Fear of significant credit losses, uncertainty about the allowance of coupon payments on CoCos, lack of liquidity, and increased extension risks were the main reasons for the drop in valuations in March 2020. Consequently, CoCos offer an attractive investment opportunity.Ĭontingent convertible bonds saw quite a strong correction in March 2020, more pronounced than in most other credit segments. From an investors’ perspective, the CoCo market is less crowded, given its complexity and technical considerations such as relatively high denominations. We expect future issuance activity to proceed at a slower pace, mostly in favor of refinancing existing securities. R.W.: The majority of the bigger European banks have now met most of their capital adequacy requirements, which would make additional issuances very costly and would reduce the net interest margin still further. Why has the asset class not grown even larger? 1Ĭompared to other credit segments, contingent convertible bonds occupy a relatively small niche. The CoCo market is currently worth EUR 200 bn. They have since become an integral part of evolving regulatory reforms that have led to a significant reduction in the risk profile of banks, with substantially improved capital adequacy and reduced inherent capital volatility. H.K.: CoCo issuance arose in the course of the 2008 financial crisis, with the aim of strengthening European banks’ balance sheets and raising solvency capital to meet the Basel III capital requirements. It is a relatively new asset class – how has it developed so far? Currently, the average spread of CoCos offered by European banks is slightly above 424 basis points (bps). Given the clear subordination and the issuer-friendly embedded options in the security, this needs to be compensated with higher credit spreads, meaning the asset class offers relatively high yields. The idea is that the loss absorption will help reinstate the issuer’s capital adequacy ratio, although it does not provide additional liquidity. If the level is triggered, the CoCo will be converted into ordinary shares or the principal will be written down. Within the bank’s capital structure, CoCos sit right above common equity, but unlike other hybrid capital instruments, they have a contractual trigger level linked to an issuer’s capital adequacy ratio. ![]() R.W.: Contingent convertible bonds, often referred to as CoCos, are securities issued by banks in order to meet their regulatory capital requirements. Investment Strategy: Philanthropy InvestmentĪccess Sales & Trading Solutions and ResearchĬlient Login Show/Hide Menu Main navigation. ![]()
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