CoCos losing their lustre, reports Moody’s

Moody’s Investors Service reports that global issuance by Moody’s-rated banks of contingent capital securities (CoCos) in 2016 is likely to total about US$75bn; well below the US$105bn recorded last year and less than half of 2014’s peak of US$175bn.

The credit ratings agency’s (CRA) latest Quarterly CoCo Monitor, titled ‘Issuance Is Gradually Recovering After Market Shutdown in February’, reports that globally, between January and mid-April 2016, the volume of new CoCo issuance fell by 50% to US$23.7bn from US$47.4bn over the same period in 2015.

Chinese banks continue to drive the quarterly CoCo issuance, accounting for 26% of issuance in Q1, although Moody’s that these are all tier 2 (T2) CoCos.

“The issuance slump in CoCos during 2016 globally follows a temporary market shutdown in Europe and the absence of any additional tier-1 (AT1) issuance in Asia so far,” said Simon Ainsworth, a senior vice president at Moody’s.

“Financial market volatility overall has affected issuance, driven by concerns surrounding the Chinese economy, weak commodity prices and, in Europe, concerns around the risk of coupon suspension.”

Earlier this year, a number of banks postponed or abandoned their AT1 CoCo issuance plans as fears grew about the point at which a breach of capital requirements by European banks, might trigger a suspension of their coupon payments.

However, after the announcement that the European Commission (EC) is working on proposals to relax the mandatory consequences of a bank breaching its capital buffers, a number of European banks resumed issuance, including UBS Group, Rabobank and Banco Bilbao Vizcaya Argentaria.

Moody’s notes that Turkish banks are increasingly issuing Basel III-compliant tier 2 CoCos to help them maintain solid capital buffers. These hybrid instruments, which allow the write-down of both interest and principal in insolvency, are less expensive to issue than tier 1 capital at a time when banks must meet increasing capital requirements. Yapi ve Kredi Bankasi and Alternatifbank have both been able to place tier 2 CoCos this year.

“The trend for tier 2 bond issuance in Turkey is also being fuelled by a faster phase-out of Basel II compliant tier 2 bonds than initially expected, with the Turkish regulator mandating that 20% must be phased out each year over the next five years,” added Ainsworth.

Since 2009 global issuance of contingent capital securities from Moody’s-rated banks stands at US$395bn as of mid-April 2016.

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