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AT1 capital/CoCo bonds: what you should know
Search Jobs. Graduate Guide. Last week's upset with Deutsche suggests it's not quite as simple as this.
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Please try again. Coco bonds are a type of debt with strings attached. The coco in the name is short for "contingent convertible," which means in some circumstances the debt converts into equity — rather than the bank owing you money, you suddenly own a little bit of the bank.
The contingent part of the bonds depends on how much cash the banks have. If a bank's capital falls below a certain level the switch is flipped and the bonds turn into shares. Because of this risk, coco bonds carry a higher yield than normal bank bonds. Coco bonds were cooked up after the financial crisis as a way to prevent banks from needing any more state bailouts. If banks were getting into trouble and running low on cash, the bonds would convert, solving two problems — the bank's debt burden lessens and its capital buffers are boosted.
Contingent Convertibles – CoCos Defination
Put simply, investors are worried they won't get their money back. There are growing fears that banks like Deutsche Bank and Santander won't be able to meet coupon payments — interest on the debt. The Independent writes :.
A recent move by the European Central Bank to publish an obscure test of bank risk, known as the Srep ratio, has driven the recent upset in the market. The results have stoked fears in the minds of credit analysts about whether recent market shocks — ranging from low oil prices to the slowdown in China — could inadvertently cause banks to breach rules which would prompt regulators to stop them paying Coco coupons. These same capital breaches could also turn the coco bonds into equity, which is falling in price and not something fixed-income investors want.
As a result of these growing fears the price of coco bonds has plummeted in recent weeks. Meanwhile the price of credit-default swaps — a sort of insurance that pays out if banks don't pay up on the bonds — has jumped.
Banks, meanwhile, have been defending their balance sheets and insisting everything is OK. World globe An icon of the world globe, indicating different international options. Search icon A magnifying glass.