Why are investors worried?
Concerns have swirled around a range of European banks, including
Deutsche Bank,
Santander and
UniCredit, amid questions about the way these bonds will be treated in the future.
While cocos are best known for the risk of capital losses, the immediate question for some banks is whether they will miss coupon payments. Deutsche Bank’s €1.75bn coco bond is trading below 75 cents on the euro, its lowest level, a 19 per cent fall in price this year.
A second question is whether buyers of coco bonds ever get their initial investment back. The bonds are perpetual, meaning they will not mature unless the bank exercises an option, typically after five years.
Investors had expected banks to almost always take up the option to redeem coco bonds, but regulators may not allow this if the bank would then have to issue new bonds at much higher costs. A perpetual bond with a 7 per cent coupon is worth much less than a five-year bond offering the same income.
Other
European bank cocos hit new lows on Monday, with those of Santander and UniCredit touching 85 and 76.3 cents on the euro respectively. Investors are not taking any chances. They are selling bank debt and shares, and paying up for credit default protection on institutions seen as being in the vanguard of coco risk.
So far no bank has defaulted on a coco bond, and losses are limited to secondary markets.
