Market jitters and lower capital needs shrink global CoCo issuance in 2016 by 25 per cent
Global issuance of contingent convertible bonds, or ‘CoCos’, ended 2016 at $75 billion, a 25 per cent decrease from the year before, said Moody’s in a report published today. This was in line with the rating agency’s most recent projections.
Commenting on the findings, Simon Ainsworth, Senior Vice President at Moody's explained, “Issuance of additional tier 1 (AT1) contingent convertible bonds, or CoCos, fell partly because many banks had already issued sufficient volumes of these instruments to meet their minimum regulatory capital requirements. Banks had also possibly been using legacy Tier 1 instruments, as well as common equity and therefore had less incentive to issue additional AT1 bonds."
Investor concern over the risk of suspended coupon payments was another driver of the global decline in CoCos issuance, notably in Europe.
Accordign to Moody’s, these market jitters, which surfaced in February 2016, continued roughly through November, although they gradually abated over the course of the year as the European Central Bank (ECB) changed Pillar 2 capital requirement calculations in a way that would make suspended AT1 coupon payments much less likely.
The global decline was mainly driven by issuance reductions of 38 per cent in Europe, 20 per cent in Asia, and 51 per cent in the Middle East. In Europe, issuance by Swiss banks decreased by 68 per cent to $2.7 billion in 2016 from a high of $8.4 billion in 2015. This was followed by a large decline in issuance by UK banks, which dropped by 29 per cent to $8.2 billion in 2016 from approximately $11.5 billion in 2015.
In China, the four largest banks, which to date have accounted for approximately $45 billion or 10 per cent of overall public market CoCo issuance by banks which Moody's rates, stepped back from the market. Issuance in China fell by nearly 60 per cent to $7.7 billion in 2016, from $18.6 billion in 2015.
North American issuance, on the other hand, remained healthy, with Canadian bank issuance rising 13 per cent to $9.5 billion in 2016. Latin American banks issued $1.2 billion in 2016, following no activity in the prior year, and Mexican banks issued for the first time in two years.