European banks seeking to meet capital targets by selling contingent convertible bonds may struggle to attract investors after regulators imposed limits on the form the instruments must take.
The European Banking Authority said last week lenders could use the securities, bonds that convert into equity or are written down if a bank’s capital drops below a set level, to help plug a 115 billion-euro ($153 billion) capital shortfall. It published a standard set of terms for the securities, which investors said were unlikely to be attractive to buyers because the risk of triggering a conversion is too high and issuers will have too much control over interest payments.
“The majority of institutions that actually need capital to reach the EBA target will not be able to attract private investors for these instruments,” said Satish Pulle, a portfolio manager at London-based European Credit Management Ltd., which oversees a fund that invests in CoCos and bank debt.
European regulators are trying to force lenders to boost their ratio of core Tier 1 capital to 9 percent of risk-weighted assets to reassure investors they can withstand the sovereign debt crisis. CoCos allow banks to raise capital without diluting existing shareholders, something that’s become more attractive after European bank stocks plunged 34 percent this year.
For CoCos to be counted toward the EBA’s target, the regulator said they should convert into equity when a lender’s core Tier 1 capital ratio falls below 7 percent of risk-weighted assets, a level some investors say is too close to on Tuesday’s capital levels.
Lloyds Banking Group Plc, the UK’s largest mortgage provider, sold 8.5 billion pounds of CoCos in November 2009 that convert to equity if core capital drops below 5 percent. The ratio was at 10.3 percent at the end of September.
