Coco Bonds: The UBS-crafted purchase of Credit Suisse sets a dangerous precedent for a very common loan security in Europe: convertible emergency bonds, or simply Coco bonds.
These bonds – also known as additional tier one bonds (AT1S) – were created in the aftermath of the 2008 financial crisis with the aim of giving banks additional ability to meet organizational capital requirements (without weakening shareholders). Practically, Coco bonds are the lowest level of bank debt.
In other words, they’re paying high returns, but they’re at the bottom of the back line (between creditors) if the bank fails. However, those bonds still take precedence over shareholders, who are the last to get anything if the company goes bankrupt.
However, this did not happen, which happened with the sale of Kreditschweizer Bank. At the same time, when CS shareholders received 3.3 billion US shares, the organizers decided to cancel the bank Coco bonds to the bank – which allocated $ 17 billion in the dust.
The deletion is intended to improve the public budget for the new bank that grew out of the deal – but it sets a dangerous precedent for a market with more than $275 billion in bonds. According to Barron, news has already impacted some of the circulating mutual funds investing in these bonds. The Investco AT1 Capital Bond ETF Index is down more than 6% today, while the Wisdom Tree AT1 Coco Bond ETF Index is down another 9%.
According to the magazine, an analyst wrote in Gavix, “It appears organizers are willing to sacrifice individual rights at the altar of the public good.” “The cracking of the Coco market means that in the coming crisis, banks will have to fund them in new ways, or shareholders will simply face huge dilution.”
To reassure investors, organizers of the European Union and England have released data to confirm that coco bonds – at least in the markets they organize – will maintain their priority over stocks, meaning they will only incur losses after shareholders.
(Switzerland isn’t part of the European Union and doesn’t seem ready to change its decision.) A Brazilian banker told the Brazil Journal that he’s always found Coco bonds to offer low price risk. He said: “When the list was issued I read it and prevented everyone from operating it because it is subject.”
“The article was very strict in the Basel list. He was in the regulation of the organizer. According to Barron’s, Quinn Emanuel Urquhart & Sullivan is already looking into the case.
In 2017, the company worked on a similar case – it was ruled in favor of the Bond campaign – including Banco Popular. The Spanish bank was bought by Santander and also saw Coco Bonds turn to dust. However, the scale was much smaller: Cocos reached $1.5 billion.