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Europe’s CoCo market freezes, leaving €40B question mark

European banks intend to raise about €40 billion in Additional Tier 1 bonds in 2016, but fears over the high-risk contingent convertible debt have frozen the market since the beginning of February.

AT1 bonds, known as "CoCos," not only carry the default risk of other bonds but also convert into equity or can be written off if the borrower’s regulatory capital levels fall below certain specified trigger points. Regulators can also stop banks from paying interest on the bonds if they consider capital buffers to be unsatisfactory. Concerns that Deutsche Bank AG might struggle to pay these so-called coupons led to a plunge in AT1 prices in February, sending yields jumping.

A €500 million bond sold by Allied Irish Banks Plc in December with a 7.38% coupon now yields 9.19%, according to S&P Global Market Intelligence data.

Other banks, whose capital levels are sailing closer to the wind, have seen still more dramatic rises in AT1 yields. A Banco Popular Español SA AT1 sold in February 2015 with an 8.25% coupon, and a conversion that is triggered if the bank’s common equity Tier 1 falls below 7%, has seen its yield more than double to 17.9%. Popular’s fully loaded CET1 ratio was 10.86% at the end of 2015, compared to 12.2% for AIB, once it completes a proposed capital reorganization. The AIB bond bears a 7% CET1 trigger.

Next Finance , February 2016

See online : S&P Global Market Intelligence: Europe’s CoCo market freezes, leaving €40B question mark

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