CoCo bonds, one year later. Bank subordinates weather Credit Suisse storm
The Swiss bank's move to favour shareholders at the expense of At1 holders was considered an isolated case. Now yields have realigned themselves to historical averages again, and managers are questioning the instrument's appropriateness, no longer its survival
3' min read
3' min read
Credit Suisse, one year on. The storm unleashed by the clay-footed Swiss giant's crisis over Additional Tier 1 (At1) bonds seems a thing of the past. Bond managers are once again questioning the subordinated debt instruments also popularly known as 'CoCo bonds', but only about their relative attractiveness: survival is no longer in question.
"Credit Suisse's move to reverse the usual order of capital structure, favouring shareholders at the expense of At1 holders turned out to be a mistake, but investors understood that it was an isolated case: in no other jurisdiction will a similar damage be repeated for this particular type of securities, which will indeed be protected by the same Central Banks and authorities that created them for regulatory reasons," says a convinced Mark Lieb, President and Chief Executive Officer of Spectrum Asset Management, Sgr of the Principal group, emphasising further that "European banks have substantially strengthened their capital since the great financial crisis and the quality of their assets is good".
Returns towards normalisation
.The performance in the markets confirms this, moreover: after the inevitable spike due to the bewilderment that followed Credit Suisse's decision, the average European yields photographed by the ICE BofA High Yield Contingent Capital index have returned to the ranks and below 8 per cent. This was due in part to an unprecedented rally in the last quarter of last year, when At1 securities issued by banks such as Raiffeisen or Deutsche Bank posted stellar performances of over 18% and similar instruments from Santander, Caixa or UniCredit itself 'settled' for +16% per cent.
Those in favour of taking a position, such as Spectrum, point out that CoCo yields are not only 310 basis points higher, on average, than those of highly rated European corporate bonds, but also 200 points higher than those of other eurozone nvestment grade subordinated financial securities, as well as higher than even the area's own high-yield (non-subordinated) bonds. Conversely, sceptics point the finger at spreads, those of At1s, which despite the lurch caused by the Credit Suisse case have returned to levels below the historical average of the last five years, 396 versus 407 basis points.
The potential of subordinated securities
."An average investment grade portfolio that includes CoCo bonds has the potential to be 200 basis points higher than one comprised solely of investment grade corporate bonds and 100 basis points higher than one comprised of other subordinated securities," Lieb notes. Among the two strategies on the launch pad designed by Spectrum for European investors is Principal Capital Securities, which invests in euro-denominated equities and hybrids and allows up to 30 per cent exposure to At1. The market for euro-denominated subordinated debt instruments has meanwhile reached a certain degree of maturity, with approximately EUR 500 billion, and represents an attractive alternative for investors wishing to increase their allocation to high-quality, higher-yielding fixed income through a strategy of decoupled returns.
