Not contingent convertibles but contingent re-convertibles. CoReCos? Re-CoCos?
Barclays Capital is, according to a report by Reuters Breakingviews, working on contingent capital that would help it meet forthcoming regulatory demands without having to issue new equity. But intriguingly, the bank has spurned the ‘traditional’ CoCo idea, going instead for something new: ‘step down, step up’ bonds.
Here’s how they’ll (reportedly) work.
If BarCap’s Core Tier 1 capital ratio falls below 7 per cent, bondholders of the ‘step down, step up’ issues would take up to a 30 per cent haircut on their investment. But, if Barclays were to recover and become profitable again, the bonds’ value would be written back up. Step down and step up, geddit?
This new contingent is rather different to CoCos — which automatically convert into equity once a certain trigger is breached, and stay that way. This has meant CoCos are often described as having all the downside of equities, with all the upside of bonds. Plus there are still giant question marks over whether the things are eligible for the bond indices beloved by institutional investors, or can be properly rated.
No surprise then, that Standard Chartered chose to issue more of that expensive equity in the capital cash call it announced this week, rather than take the CoCo-route. The £3.25bn StanChart issue, of course, kicked off speculation BarCap might be next in the race to satisfy regulators’ loss-absorbing demands. Step down, step ups could be a way of doing that, and solving the CoCo conundrum to boot.
Gary Jenkins, head of fixed income at Evolution Securities, certainly sees potential:
Whilst not converting into equity might be a negative from a regulatory point of view the idea does have the characteristics of loss absorbency which the regulators are looking for and also would fit more naturally into bond portfolios. In addition it is likely that the rating agencies would be prepared to rate this kind of product whereas they have said that it is less likely ratings will be assigned to hybrids where it is difficult to assess the potential loss to investors. And of course if they are rated they could be eligible for indices, so all in all this could be an interesting development.