Tags: Riskiest Bank Debt Facing First Test With Regulatory Scrutiny

Europe's Riskiest Bank Debt Facing First Test With Regulatory Scrutiny

Wednesday, 06 August 2014 09:43 AM

Europe’s growing market for the riskiest bank bonds is facing its first test after regulators clamped down on sales of the securities to individual investors.

Average yields on contingent convertible bonds, or CoCos, rose to 5.92 percent, the highest since February, according to Bank of America Merrill Lynch’s Contingent Capital Index. Yields on KBC Groep NV’s 1.4 billion euros ($1.9 billion) of 5.625 percent CoCo bonds rose 13 basis points to 5.75 percent, according to data compiled by Bloomberg.

Bonds fell after the U.K.’s Financial Conduct Authority said it will ban firms from selling CoCos to the retail market and European regulators warned that the risks of holding the securities aren’t being explained to buyers. About $50 billion of the debt, which is designed to incur losses without defaulting, is outstanding.

“CoCos are an immature asset class that has broadly been untested, so we are only discovering now how firm the holders are in a shakeout,” said John Pattullo, head of retail fixed income at Henderson Global Investors Ltd. in London. “In the long term the market for CoCos will continue to grow because banks need to issue them for loss absorption, but I am not convinced you should hold them through the cycle.”

Investor appetite for the debt has also declined after Bank of America Merrill Lynch said it would exclude CoCos from some of its indexes, said Pattullo. The notes will be removed from the U.S. bank’s gauges for global investment-grade and high- yield corporate bonds, according to a July 31 report.

Share Conversion

CoCos, which are are also known as additional Tier 1 securities, are the riskiest bank debt because they have no set maturity, have optional interest payments and can be written down or converted to shares. The fixed-income securities automatically convert into ordinary shares if a firm’s capital falls below a pre-determined level.

From Oct. 1, the FCA will limit sales of CoCos to institutional, professional investors and high-net-worth individuals for 12 months, the London-based regulator said in a statement yesterday. The FCA will publish a consultation paper on a set of permanent set of rules for CoCos in September.

“Whatever pundits say about retail being a tiny part of the CoCo market, it’s now the discredited CoCo market which is going to push down prices because at least one potential buyer base is gone,” said Bill Blain, a strategist at brokerage Mint Partners Ltd. in London.

To contact the reporter on this story: Alastair Marsh in London at amarsh25@bloomberg.net To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Michael Shanahan, Chapin Wright

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Riskiest Bank Debt Facing First Test With Regulatory Scrutiny
Riskiest Bank Debt Facing First Test With Regulatory Scrutiny
Wednesday, 06 August 2014 09:43 AM
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