The CoCo conundrum

The CoCo conundrum

Contingent convertible bonds (CoCos) have swiftly moved into the mainstream as regulators put more pressure on banks following the financial crisis. However, Dan Daldry, a manager in the fixed income team at Alliance Trust, argues there are many risks in the sector.

European banks have been issuing CoCos - contingent convertible bonds - at a rapid pace over the past 12 months. There are several different varieties of CoCos in the market, but the bulk of the issuance is occurring within the ‘tier 1' CoCo market. There has been more than €35bn of these new generation capital instruments issued so far, and the market is set to grow further. With interest rates at rock bottom levels, relative economic stability, central banks continuing to be accommodative, and investors hungry for yield, the environment could hardly be more conducive to issuance of ...