Global regulators’ decision to stop banks using contingent convertible (CoCo) bonds to meet planned capital rules may cut the market for the securities by about half.
Lenders will only be able to use common equity to meet additional capital requirements for the world’s largest banks, Mario Draghi, chairman of the Financial Stability Board, which has to approve proposals put forward by Basel regulators, told reporters in Paris on July 18. His comments came after the Basel Committee on Banking Supervision last month blocked the use of securities such as contingent convertibles to meet the rules.
Draghi’s “announcement snuffed out any chance of re- visiting the issue,” Mediobanca analysts led by Antonio Guglielmi, head of banking research, said yesterday. “While CoCos certainly will have their uses, it seems the investment banks will be allocating less resources to developing this product given the market, at least from an issuer’s perspective, has shrunk considerably.”
When Credit Suisse Group, Switzerland’s second-largest lender, sold $9 billion of CoCos in February, Standard & Poor’s said the market could eventually surpass $1 trillion — three times the value of all high-yield bond offerings last year. Analysts said Barclays, Royal Bank of Scotland (RBS) and Deutsche Bank would follow. Apart from Bank of Cyprus’s ¤1.3-billion ($1.8 billion) CoCo in March, offerings have dried up, and investors say sales may only ever total $500 billion.
MUCH MORE SELECTIVE
“Are we going to see a $1 trillion market? No,” said Mirko Santucci, head of Credit at Swisscanto Asset Management, which started a fund to invest in CoCos in May. “Will it get to $500 billion? Maybe. Will we be there in two years? No. Will we be there in five to seven? Probably.”
The decision leaves firms such as Swisscanto and Pacific Investment Management Co (Pimco), which started a fund to buy CoCos in May, looking to invest in other bank securities such as subordinated debt and hybrid instruments.
“This doesn’t kill CoCos, but the market will be much more selective than many expected,” Philippe Bodereau, the Pimco executive in charge of the Pimco Capital Securities Fund, said in a telephone interview. “Regulatory support has diminished just as investor interest begins to grow.”
Deutsche Bank and RBS declined to comment. Barclays Chief Executive Officer Robert Diamond told UK lawmakers on June 8 the lender was “very close” to having a regulatory compliant CoCo after spending “an awful lot of time” with the FSB and the UK’s Financial Services Authority. A spokesman for London- based Barclays declined to comment further.
