The CoCos is the name as the Convertible Contingent Bonds are known. A financial product that some experts baptized a few years ago as “the new preferred shares.” These are debt issues by banks to raise capital, which at any given time, if the financial institution falls below a certain level of capital, can be converted into shares at a previously agreed price.
These bonds are also called hybrid issues, since they have characteristics of debt (the interest paid to the investor) and equity (loss absorbing capacity).
It is not a product intended for small savers, but for institutional investors, since CoCos are classified as AT1 type, that is, the riskiest type of bond that a bank can issue, which is why it has a higher interest rate than others. investments.
The economic crisis of 2008, whose outbreak was due to the lack of rigor in the granting of mortgage loans by banking entities, led the financial system and governments to introduce measures to control the solvency levels of banks. One of them were Contingent Convertible bonds, whose objective is to reinforce the capital of banking entities (attracting investors) while complying with the capital requirements imposed by the same entities.
CoCos are convertible bonds because they allow debt to be converted into common equity. And they are contingent bonuses because they are detailed in which situations the conversation will or will not take place. Likewise, they are perpetual bonds, that is, they do not have a fixed maturity, although the issuer reserves the right to redeem the bond, once a specific period has elapsed since its launch (the most common is five years).
On paper, when a financial institution is solvent, the CoCos investor receives its bond coupon, but when it goes through major problems, the entire investment made can be lost. The issue prospectus specifies when these issues are converted into shares, one of the most common situations being when the CET1 ratio drops below a certain value.
All holders of CoCos (banks around the world have issued more than 250,000 million dollars in this type of debt) look with concern at what is happening in recent days in Switzerland. And it is that the purchase of Credit Suisse by UBS will mean a complete amortization of the nominal value of all the debt in Credit Suisse CoCos, about 16,000 million francs (16,185 million euros). Instead, shareholders will receive compensation in UBS shares.
The fact that the holders of these bonds are the first to assume the losses, ahead of the shareholders, has internationalized the uncertainty among Cocos investors in the face of doubts that other supervisors and regulators will adopt the same position. And it is that, traditionally, when a bank goes into resolution, the first to lose their investment are the shareholders and, if this is not enough, then it is the turn of the investors of unsecured bonds.
After what happened with Credit Suisse, the European banking supervisor, the Single Supervisory Mechanism (SSM), hastened to issue a statement, together with the European Banking Authority, making it clear that a resolution like the one suffered by the Swiss entity is impossible. and unthinkable in Europe. For her part, the president of the European Central Bank (ECB), Christine Lagarde, asserted that “Switzerland does not set standards in Europe regarding the resolution conditions of banking entities.”
The Spanish market currently has an outstanding balance of around 22,000 million euros in contingent convertible debt. According to the figures compiled by Europa Press, Santander stands out, with 7,811 million euros in these AT1 issues; CaixaBank and BBVA, with nearly 5,000 million euros, and Sabadell, with 1,750 million and three issues, after exercising its right to prepay a 400 million issue made in 2017. Ibercaja is behind (700 million euros, although in February it announced that it would amortize in April an issue of 350 million euros made in 2018), Bankinter (650 million), Abanca (625 million) and Unicaja Banco (500 million euros).
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