Barclays Announces New Contingent Capital (CoCo) Bond Index

June 9, 2014, 11:59 a.m. EDT

New standalone global benchmark for investment-grade and high-yield CoCo securities

NEW YORK, Jun 09, 2014 (BUSINESS WIRE) -- Barclays announced the launch of a new Global Contingent Capital Index, a multi-currency benchmark measuring the performance of investment-grade and high-yield contingent capital (“CoCo”) securities. This standalone benchmark tracks the market of hybrid capital securities that do not qualify for other flagship Barclays Aggregate, High-Yield, Capital Securities, or Convertibles Indices.

“CoCo issuance has steadily grown in recent years and we anticipate further expansion of this market as financial institutions issue these bonds to help achieve required regulatory capital ratios,” said Brian Upbin, Head of Benchmark Index Research at Barclays. “Though CoCos are not eligible for broad-based bond indices such as the Global Aggregate, there are debt investors who hold these securities as out-of-index investments and need a benchmark of asset class risk and returns.”

The Barclays Global Contingent Capital Index includes hybrid capital securities with explicit equity conversion or writedown loss absorption mechanisms that are based on an issuer’s regulatory capital ratio or other explicit solvency-based triggers. Subindices by currency, country, credit quality, and capital security type are available as part of this family. Bespoke credit and high-yield indices that include traditional hybrid capital as well as contingent capital securities are also now available with this expanded security coverage. The inception date of this index is May 1, 2014, and the index universe contains 65 CoCo issues with a market value of $98bn as of May 31, 2014.

This new index will be available on Barclays Live and fully supported on the Barclays POINT® portfolio analytics platform. The index will also be available through other data distribution platforms that offer Barclays indices. Interactive Data Pricing and Reference Data, LLC is a provider of pricing for this new index.

Barclays is an international financial services provider engaged in personal banking, credit cards, corporate and investment banking and wealth management with an extensive presence in Europe, the Americas, Africa and Asia. Barclays’ purpose is to help people achieve their ambitions – in the right way. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs approximately 140,000 people. Barclays moves, lends, invests and protects money for customers and clients worldwide. For further information about Barclays, please visit our websitewww.barclays.com .

SOURCE: Barclays

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Germany clears way for more contingent convertibles (CoCo’s)

by ARTEMIS on APRIL 11, 2014

The German finance ministry has given the countries banks a green light to pursue the issuance of contingent convertible bonds, or CoCo’s, and other contingent capital deals as it clarified the instruments tax treatment.

A report from Reuters states that the German finance ministry has agreed that banks issuing contingent convertibles can deduct interest payment on the bonds from their tax bills. This makes the use of contingent capital as a form of just-in-time capital, or catastrophe insurance, for banks feasible in Germany.

Contingent convertible bonds and other contingent capital issues are similar to catastrophe bonds as they provide a source of capital protection when certain qualifying factors, or triggers, are met. Convertible bonds often convert into equity, so the bond holders see their investments converted into shares and the issuing company benefits from the boost to share capital. Other contingent deals can be written down or even wiped out when the trigger conditions are met.

Some contingent capital deals are linked to bank capital levels, capital ratios, solvency ratios or event to the occurrence of catastrophe losses in the case of a transaction issued by reinsurer Swiss Re. Artemis has covered these transactions a number of times over the years, saying that they are becoming to ‘catastrophe insurance for banks’ as we predicted in our November 2009 article.

The German finance ministry told Reuters; “The finance ministry, together with the federal states, today created legal certainty on the treatment of instruments of banks’ additional core capital, so-called CoCo-bonds. On the basis of existing tax law, banks in Germany can use these instruments with comparable conditions to their European competitors.”

For banks, contingent capital provides a source of tier one capital which it can use within Basel III capital calculations, hence the German banking industry has been keen to see clarity over their tax treatment. Reuters suggests that we could see a flurry of transactions from the major German banks now that contingent convertibles are a more attractive proposition from a tax perspective.

Reuters reports that Deutsche Bank is expected to issue at least $7 billion of additional tier one capital through contingent bonds before the end of next year. Other banks are expected to follow suit to protect their capital ratios. Some reports suggest that globally we could see $150 billion of contingent capital issued in the next few years as banks and other financial institutions look to take advantage of this form of financial catastrophe insurance.

Whether the clarification of the tax treatment of contingent capital bonds might persuade one of Germany’s large reinsurance firms to issue contingent bonds is uncertain. They may be a useful tool for reinsurers like Munich Re and Hannover Re, if they were to structure a contingent deal using a catastrophe trigger in a similar way to Swiss Re’s transaction.

There is some cross-over in the investor base between insurance linked investments (such as catastrophe bonds) and contingent capital or convertible bonds, particularly the fixed income investors. While CoCo’s do not have the useful low-correlation benefits of an investment in pure catastrophe or reinsurance risks, they are attractive due to their potential yield, the binary nature of their trigger and often the (perceived) remoteness of the risk issued when compared to the possible return.

SPAIN:Watchdog to keep an eye on impact of convertible bonds

CNMV securities commission says that companies must be more transparent in presenting accounts

Spain’s National Stock Exchange Commission (CNMV) says that it will be paying “special attention” to tax breaks that companies try to give themselves when presenting their annual accounts. In a statement issued this week on the supervision of annual financial reports by companies traded on the Madrid stock exchange for 2012, the CNMV said that among its priorities for the coming financial year will be making sure that new rules published last month setting out how debt securities can be used to bolster banks’ capital are observed.

The CNMV said that among its other priorities for 2014 will be the new breed of bank debt that turns into equity if a lender hits trouble. The instruments, known as “contingent convertibles,” began to get attention following the financial crisis and have been issued by a few banks. CoCos, as they are called, are sold as interest-bearing debt that has to be paid back. But they convert to equity in the event that a bank’s capital ratios fall below certain levels.

CoCos boost the capital ratios of banks not healthy enough to attract private investment. Capital ratios are an important measure of financial health, and many European banks this year struggled to increase those ratios to comply with new European regulations. The CNMV said that the 2008 financial crisis underlined that many debt securities banks had counted as capital couldn’t absorb losses outside of a default, prompting regulators to tighten the rules for what can be Tier 1, the most junior layer of capital. While that must consist of equity and retained earnings, lenders can also hold additional securities specifically designed to absorb losses in a crisis.

Bond buyers have shown they are willing to buy CoCos as central banks print money to hold down rates, forcing investors to take more risk to get a return. CoCos absorb losses either by converting to equity or by being written down.

Investors and banks have been skeptical about CoCos, concerned that as the bonds reach their conversion point, equity investors might see that as a bad sign and flee, sending the bank into a downward spiral.

The CNMV also says that it will be imposing measures to guarantee transparency and comparability relating to all information given on financial instruments, and that this would require companies to improve the quality of their annual reports.

Source: El Pais in English, EP Madrid27 DIC 2013 - 20:52 CET