Santander set to lead wave of coco sales
Three banks are poised to issue their first so-called “coco” bonds as investors anticipate a coming flood of supply in the high-yielding, high-risk asset class.
Spain’s Santander is seeking to raise at least €1bn and Denmark’s Danske about €750m in additional tier one contingent convertible bonds, according to people familiar with discussions. Britain’s Nationwide building society, is poised to become the first non-listed financial institution to issue a coco with a £1bn bond.
The issues mark the start of an expected deluge of cocos this year as banks seek to cash in on investors’ hunger for yield and build up their capital buffers ahead of European regulators’ stress tests.
“We’re finally seeing an acceleration of issuance,” said Simon McGeary, a managing director of capital markets’ new products group at Citi.
“I can’t remember the last time we had three tier one deals simultaneously - even pre-crisis - but the level of investor interest continues to be tremendous.”
Contingent convertible - or coco - bonds were created in the aftermath of the 2008-09 financial crisis to ensure creditors absorbed a bank’s potential losses and to avoid the need for taxpayer-funded bailouts.
Some cocos convert to equity once a bank’s pre-agreed core tier one capital threshold is triggered. Others, so-called ‘sudden death cocos’, simply write down investors’ principal.
Analysts expect between €30bn and €50bn of coco issuance by European banks this year. Interest payments on the subordinated debt instruments are discretionary but they are popular because investors can reap coupons in excess of seven per cent on investment grade names.
The latest issues follow robust demand last year when year-on-year issuance doubled. Issuance this year, excluding the latest deals, totals $4.7bn, more than double the amount issued over the same period in 2013, according to Dealogic, the data provider.
Except for a $675m issue by Spain’s Banco Popular Español last year, to date the coco market has been dominated by large, “national champion” banks.
However, some analysts expect more second-tier banks to join the fray. “Smaller names may start to come in the slipstream of the national champions,” said Mr McGeary.
Critics, though, are concerned that investors are being blinded in their hunt for yield.
Last month Standard & Poor’s, the rating agency, announced plans to cut its ratings on some instruments that were much riskier than first thought.
That move followed concerns raised by the Bank of England in November that coco investors were mispricing the risks of being converted.