Posts tagged 'Contingent capital'

About that Deutsche Bank capital…

Gather round nerds, and hear the tale of Deutsche Bank’s mysterious new CoCo bonds.

It’s a tale that involves an €8bn capital raising anchored by the Qataris, some German accounting standards and one terrible cereal-based pun. Read more

The perpetualisation of debt

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

The CoCo cap – a mere €150bn?

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

Regulators agree extra bank capital protection

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.

Credit Suisse places $6.2bn in contingent capital

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’s $6.2bn Swiss finish

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

Banks eye up Barclays’ CoCos

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.

Will rate CoCo bonds for food

Has Fitch Ratings just given the hybrid capital market one big boost?

On Monday the rating agency quietly issued an 800-word statement outlining why it “expects to be able to rate new generation bank hybrid securities” — which, conveniently enough, was also the title of the piece. It reads, as Gary Jenkins over at Evolution notes, “as much as a solicitation for business as an explanation” as to why their rating methodology will work for things like Contingent Convertibles (CoCos). Read more

European bank bail-ins will cost +87 basis points

Regulators may be considering European bank bail-ins — or forcing creditors to share the losses of failed banks — but how do investors actually feel about such measures?

(So what, you might scoff — who cares what those spoiled bondholders think? But remember regulators need to balance burdensharing with banks’ future funding costs, if they want to encourage them to lend. So it is worthwhile to ask, though you should expect a certain degree of brinkmanship involved in their responses). Read more

BarCap’s CoCo comeback

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

CoCos can cost – your bonus

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

That’s a big bowl of (Swiss bank) CoCos

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.

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The IBC’s six degrees of (banking) separation

The future of the British banking sector, might just be right here

On Friday we get the trailed publication of the UK Independent Commission on Banking’s so-called ‘Issues Paper’ and call for evidence. It’s 68 pages of rip-roaring industry stuff, but we’ve picked out the more interesting “reform options” for you below. Read more

Flipping the capital structure || erutcurts latipac eht gnippilF

The Basel Committee published a 20-page consultative document on loss absorption in capital instruments — something that’s (finally) gaining some serious regulatory attention after the recent financial crisis, says FT Alphaville. Then the tendency was for shareholders to bear the burden of bank losses, while bondholders were bailed-out by the government, with the banks. But will bondholders now get too much potential downside risk, with equity holders getting too much potential upside? Read more

Basel gives good CoCo

Basel goes bank CoCo nuts. Or as the Basel Committee has put it more, ah, soberly:

The Basel Committee is of the view that all regulatory capital instruments must be capable of absorbing a loss at least in gone-concern situations. Furthermore, it believes that a public sector injection of capital needed to avoid the failure of a bank should not protect investors in regulatory capital instruments from absorbing the loss that they would have incurred had the public sector not chosen to rescue the bank.

 Read more

RBS ponders debt buy-back

RBS is planning a vast balance sheet restructuring in an attempt to boost its capital and standing with bond investors. The move could involve at least £10bn (€11bn) of the bank’s £28bn of debt being bought back at a premium to current prices. This would echo similar moves at other banks, most obviously Lloyds TSB, which in December unveiled a £10bn deal as part of a £23.5bn capital restructuring.

Rabobank’s non-regulatory capital

Meet the new (more mysterious) hybrid capital on the block, says FT Alphaville. It comes courtesy of Dutch agri-lender Rabobank and it differs somewhat to the latest versions of the stuff, in particular Lloyds’ contingent convertibles, or CoCos. Instead of converting into equity in times of crisis, the new securities will be written down by 75 per cent of their face value, with the remaining 25 per cent paid to investors.


The Moody’s report on changes to its methodology for rating hybrid debt contains a bit of a potential hurdle for the stuff that is meant to replace it: Contingent Convertible securities, or CoCo bonds.

From the report: Read more

A CoCo Cashbox

Let’s get CoCorporate lawyer-y (sorry).

In recent weeks, FT Alphaville has become intimately familiar with the concept of CoCos, or contingent convertibles. We shall now turn to the mechanics of the actual capital structure (joy). Read more

Guess the balance sheet

If you’re still trying to get your head around how contingent convertible notes — CoCos — might help the banking sector the following will be of interest.

First, consider the below table from Barclays Capital analyst Bruno Duarte: Read more

The CoCo indexing conundrum

How confusing is this?

LONDON, Nov 11 (Reuters) – Bank of America Merrill Lynch  reversed its position for a second time on Wednesday to decide its bond indexes would not include new contingent capital securities, devised for UK bank Lloyds.

 Read more

Cuckoo for CoCos

Fresh off the London Stock Exchange, more Lloyds CoCos (that’s Contingent Convertibles) for everyone:


I should not have CoCo-ed?

As outlined in our criteria, we do not consider contingent capital securities to be a form of common equity. We can include them as hybrid equity depending on their exact features. If the conversion trigger is set at a level that we think would lead to a conversion occurring too late, then we will treat the contingent capital security according to its initial format when considering how much “equity credit” to give to the instrument. For example, if a contingent capital security initially takes the form of a nondeferrable subordinated bond, we would treat it as having “Minimal” equity credit according to our criteria. In this case, we would see the conversion as happening too late to give equity credit in our broad measure of capital–adjusted total equity, which includes hybrid capital securities subject to strict limits.

Oops. Read more