Piers Ronan, a director on Credit Suisse’s debt syndicate desk, adds: “The product was never designed for the true retail investor. Part of the reason is that the minimum holding size is at least £100,000 or equivalent which already puts them out of reach. Some of the early deals in 2009 and 2010 had high net worth individual participation through private banks, but they have been crowded out by institutions that are attracted by the relative high yields.”
Jonathan Weinberger, head of capital markets engineering at Societe Generale, also does not believe the FCA ruling which came into effect in October will have an impact on the depth and breadth of the CoCo market.
“The FCA made a point of highlighting the suitability of CoCos to retail investors but they were not an important buying contingency. We think the market will continue to grow as they become better understood and an important part of a bank’s financing mechanism. Also, we see the development of a secondary market which will only improve transparency and liquidity.”
According to Societe Generale figures, total bank Tier 1 CoCo issuance in 2014 (across all currencies of issuance and all domiciles of issuer) in the eurozone was 50.3bn. Of that amount, 10.7bn has been denominated in euros while 24.9bn was based in US dollars ($32.5bn). Credit Suisse projects there could be an additional €20bn coming to market by year end after October’s asset quality review, which subjects bank balance sheets to rigorous stress tests to ensure they can withstand a 2008-style crisis. Looking further down the line, estimates vary between €100-200bn by 2018 to 2019.
BANK ISSUANCE
To date, the bulk of transaction has emanated from household name European banks. They are on the deleveraging path and issuing additional Tier 1 bonds to strengthen their buffers in the wake of Basel III requirements which in the European Union are being implemented via the Capital Requirements Directive. Under the regulation, banks are required to hold common equity Tier 1 (CET1) capital equal to 4.5% of risk-weighted assets and an additional 1.5% in loss-absorbing additional Tier 1 (AT1) capital. The main attraction of issuing CoCos is they are a cheaper source of capital than equity for improving their leverage ratios.
Institutions such as Barclays, Deutsche Bank and Societe Generale kicked off the year with a bang followed by Banco Santander and UniCredit in the autumn when the dust settled after the Banco Espirito Santo restructuring. The most recent entrant to make a splash was HSBC which issued three additional tier one CoCo bonds collectively worth $5.6bn – one in euros and two in US dollars. The most notable aspect of the deal was its investment grade rating – Baa3 rating from Moody’s Investors Service and a slightly higher BBB from Fitch Ratings. There will be an increase in the number of these higher rated deals as the market grows and develops.
Nik Dhanani, managing director, treasury solutions at HSBC believes the rating is also a reflection of the overall underlying strength of the issuing bank.
“I do not think an investment grade rating is critical or a prerequisite to a successful placement because deals that did not have one have been multiple times oversubscribed,” he says. “I think what we will see is that those funds that are rating constrained will relax their restrictions over time.”
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