FT Alphaville has just returned from the Danish Institute for International Studies’ conference on central banking in Copenhagen.
The theme was “central banks at a crossroads” — which we thought was particularly apt — and discussions ranged from collateral-backed finance and shadow banking to central bank independence. Indeed, many thanks to the DIIS for having us.
But one presentation, we would have to say, stood out more than most; that of Anat Admati, George G.C. Parker professor of finance and economics at Stanford Graduate School of Business, who’s out with a new book this month entitled “The Bankers’ New Clothes“. Read more
It comes from a hedge fund activist par excellence:
That’s a letter (hat-tip to Bloomberg) from Christopher Hohn, managing partner at The Children’s Investment Fund, to British financial regulators questioning “loss absorbency” of contingent capital at the state-backed lender. The FT reports: Read more
The final number will exceed the €14bn Bankia needed to meet government-enforced provisions. The €19bn investment is in addition to an earlier €4.5bn government investment in preference shares which was flipped into equity, giving the state a 45 per cent shareholding two weeks ago. Existing investors face being all but diluted out of the bank unless they take up pre-emption rights to buy new shares.
The same number comes from El Mundo, which adds that two capital increases are planned — one for BFA, Bankia’s very messed-up parent, and for Bankia itself. Read more
Also a mandatory increase in real estate loan provisions to 45 per cent.
Selected flashes from Spanish economy minister’s press conference at pixel time… Read more
The CoCo death spiral is the process by which the expectation of a swathe of bank-issued Contingent Convertible (CoCo) debt converting into equity can exacerbate share price declines.
- We constructed a valuation model calibrated on the CoCos of Lloyds and CS. Read more
Central bankers and regulators have agreed to impose an extra capital charge of 1 per cent to 2.5 per cent of risk-adjusted assets on the largest banks in a bid to protect them from the big losses that could trigger another financial meltdown. The FT reports that the deal agreed a smaller increase in capital than central bankers had wanted, in exchange for stricter rules on what can constitute core tier one reserves. About eight banks will have to hold 9.5 per cent of risk-weighted assets as this capital by 2019, while about 20 will have to hold 8 to 9 per cent. The agreement represents a victory for countries like the US and the UK, however Reuters says the deal will disappoint some banks that hoped to use so-called contingent capital or “cocos” to make up the surcharge.
It’s all change for banks, for sure. But if you’re seeking some trade ideas to cover ‘global’ banking themes like Basel III and CoCos, then Barclays has got you covered.
To understand Andrew Haldane’s latest — all you have to do is glance at these charts.
One is regulatory bank capital, the other is a market-based signal of bank solvency: Read more
Investors are tired of hedging against unrealised tail risks. That much we know.
What happens, though, when that tail risk does emerge and investors rush to hedge the unthinkable, once it’s a bit more thinkable? Please meet the CoCo death spiral. Read more
Moody’s on Monday:
For both securities, there is a persistent challenge for investors: how to determine the potential for loss when the triggers resulting in equity conversion are not transparent and allow for significant regulatory discretion. This same difficulty in predicting the loss associated with contingent capital securities is why we have decided not to rate such securities at this point in time. In addition, investors are taking equity risk with the upside limited to the return of principal at redemption or maturity. Read more
Investors on Thursday flocked to the benchmark issue by Credit Suisse of a new financial instrument regarded by regulators as a key tool for rebuilding banks’ capital strength, placing orders of $22bn – 11 times the $2bn on offer, reports the FT. The deluge of orders represented a big vote of confidence in the nascent market for contingent capital bonds, or cocos. Priced with an interest rate of 7.875% the sale is likely to spur other banks to consider cocos, a hybrid form of capital designed to convert into stock at a preset level of financial stress. Credit Suisse’s sale was considered a key test of market sentiment, since it was the first listed bank to offer the bonds in a standalone sale.
Here’s a capital curio for investors in Credit Suisse’s Monday-announced CoCos issue.
It’s probably not a surprise that a transition from the Basel II to Basel III regulatory regimes might create some scope for capital confusion. But here’s a concrete example picked out by Cannacord Genuity banking analyst, Cormac Leech. Tier 1 common equity ratios under the supposedly-stricter Basel III could end up being bigger than the ratios under Basel II definitions for some banks during the transitional period. Read more
Credit Suisse is planning a $7bn-plus issue of new financial instruments that have been hailed by regulators as a key plank in the rebuilding of banks’ capital strength, reports the FT. The sale of new contingent convertible – or coco – bonds will be a critical test of investor appetite for the instruments, which convert to equity at a pre-agreed level of financial stress. The sale however excludes US investors due to regulatory restrictions, and many traditional fixed-income managers have said they cannot hold cocos as their mandates exclude equity-linked instruments. Lex hails Credit Suisse’s move as “a small step towards a safer global banking system” and urges the US to “take note”. FT Alphaville meanwhile notes that finding investors for cocos is “always the key”.
Credit Suisse has announced that it will issue $6.2bn of contingent capital notes, debt that will convert into equity at a certain trigger point, reports FT Alphaville. Qatar Holding LLC and Saudi Arabian conglomerate, the Olayan Group, two of the Swiss bank’s biggest investors, will receive some notes in exchange of existing hybrid debt issued by Credit Suisse. Only Swiss regulators have so far explicitly backed cocos, in plans to make Credit Suisse and UBS issue billions of dollars worth of the bonds by 2019 to provide an extra capital buffer, the FT reports, noting that the sale will be watched closely by the market for signs of interest in the products.
Credit Suisse says it just gave the latent CoCo market a $6.2bn shot in the arm.
On Monday morning the Swiss bank announced it would issue Chf 6bn ($6.2bn) of Contingent Convertible securities — or debt that will convert into equity once a certain trigger is reached. In this case the trigger is if Credit Suisse’s reported Basel III common equity Tier 1 ratio falls below 7 per cent, or if the Swiss regulator thinks that the bank requires public support. The CoCos therefore look like they satisfy both Finma and Basel’s ideas of when CoCos should convert. Qatar Holding LLC and Saudi Arabian conglomerate, the Olayan Group, are the investors in the new CoCo issue. Read more
How regulators can build a market for reasonably-cheap-to-issue Contingent Convertible capital, by Barclays: Step 1) Eliminate mark-to-market accounting to ensure that asset price swings never result in a CoCo trigger being reached…
… Oh, wait… Read more
Big banks on both sides of the Atlantic are weighing whether to follow Barclays as it pushes ahead with a plan to pay bonuses with innovative bonds, dubbed cocos, the FT reports. According to several banks present at last week’s World Economic Forum in Davos, the idea of using contingent convertible notes as a remuneration tool is gaining ground. One senior US executive said: “Regulators in the US haven’t yet said cocos are fantastic. But if that happens, then I do think it could be an interesting idea.” The FDIC and other regulators have until summer 2012 to publish a report on how contingent capital should be used within the US financial system.
Big banks on both sides of the Atlantic are considering whether to follow Barclays as it pushes ahead with a plan to pay bonuses with innovative bonds, dubbed cocos, reports the FT. According to several banks present at last week’s World Economic Forum in Davos, the idea of using contingent convertible notes – which convert into equity when the issuer reaches a crisis trigger point — as a remuneration tool is gaining ground. The FT reported recently that, pending regulatory approval, Barclays aimed to unveil the coco bonus plan next month. European regulators, particularly in Switzerland, look favourably on cocos as a way to boost capital.
Bankers in New York and London were on Monday night still digesting news that Barclays is planning to pay a large portion of bonuses in the form of debt that converts into equity if the bank gets into trouble, reports the FT. But while the UK bank may be the first to adopt a pay system that includes issuing so-called “contingent convertible” or “coco” bonds as part of employees’ bonuses, it is unlikely to be the last, say remuneration experts. Cocos are essentially bonds with a preset trigger point, such as a bank’s capital levels or another measure of financial stress. Like a normal bond, they pay an annual coupon but if the trigger point is reached, they automatically convert into a form of equity.
CoCo *pops.* Curtains for CoCos. And so on.
Late on Thursday the Basel Committee released its final (and curt) rules on loss-absorbing bank capital, including the mandate that all Tier 1 and Tier 2 instruments are able either to be written off or converted into equity at the behest of regulators. Read more
The Bank of England can always be expected to bang on about banks’ financial health. But with the eurozone slowly imploding on its doorstep and — as the FT notes, with the global financial crisis still vivid in the memory, the Bank “was never likely to show signs of complacency” in its latest Financial Stability Report, issued on Friday.
Not surprisingly, the Bank’s twice-yearly report warns of the severe stresses faced by the European financial system in recent months and also expresses concern about the many other risks to financial stability in the UK and around the world. Read more
Those squirrely Contingent Convertibles — bonds which would automatically convert into equity once a bank’s capital ratio falls below a certain trigger — are still riddled with question marks. In particular, who will buy something which is often described as having all the upside of bonds and all the downside of equity? Read more
Credit Suisse plans to begin issuing billions of dollars in contingent-capital bonds, or cocos, in the next year to help shore up the bank’s capital ahead of new Swiss regulations, reports the FT. Brady Dougan, chief executive since 2007, also defended Credit Suisse’s decision to award one-off payments to about 400 senior employees whose bonuses had been slashed to avoid a 50% supertax on bonuses over £25,000 ($39,500) in the UK, arguing the payments were needed to retain valued staff. While Credit Suisse has until 2019 to meet new contingent capital rules, Dougan told the FT he would aim to issue so-called “coco” bonds soon to assure investors and regulators that there was adequate demand for the debt.
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. Read more
Here’s a data point for those skeptical of CoCo capital’s saving graces.
(CoCos, or contingent convertible capital, are a kind of convertible bond that automatically switch into equity once certain capital or bailout triggers are breached.) Read more
Presenting the Credit Suisse cuckoo-for-CoCos roadshow…
[July 22 Q2 2010 earnings call transcript] We are encouraged by what seems to be an increased consensus among policymakers on contingent capital securities, as a key element of future capital structures. Read more