Global sales of the riskiest bank bonds have fallen by almost a third in 2016, according to a new report from Moody’s.
New issuance fell to $58.7bn to the end of September, down from $84.4bn over the same period in 2015, writes Thomas Hale.
Coco, or “contingent convertible”, bonds are part of a post-financial crisis kaleidoscope of bank debt designed to make the system safer. They force losses on investors when a bank’s capital position – an indication of balance sheet strength – falls below a certain level.
Moody’s, the rating agency, suggested that the fall in new sales was related to concerns over the risk of missed coupons on the bonds – another way in which losses can be imposed on investors.
Fears of missed coupons hit the radar at the start of 2016, with complicated regulatory rules exacerbating a sudden loss of confidence in the instruments as bank shares tumbled.
Those fears re-emerged in light of Deutsche Bank’s volatile market performance in September, after the German bank announced it was negotiating with the US Department of Justice over claims for the mis-selling of mortgage-backed securities.
In its report, Moody’s said that it does not expect Deutsche’s management to settle for an amount that would “jeopardize” its ability to make coupon payments on the bonds.
Issuance was particularly weak in Europe, where only $21.4bn of bonds were sold by the banking sector, compared to $40bn in the first three quarters of 2015.
To compensate for their higher risks, coco bonds pay investors higher yields than most other fixed-income products. They often move closely in tandem with bank shares, which have moved sharply this year due to fears over low interest rates and their impact on bank profitability.