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Über dieses Buch

This book is a comprehensive guide to the new generation of hybrid securities: subordinated and perpetual bonds with deferrable coupon first issued around 2003, and the youngest member of the hybrids family named CoCos (contingent convertibles) being a product of Basel III or European Union CRD IV regime (2014). Contingent capital constitutes a contractual recapitalization mechanism for troubled financial institutions. An increasing number of European banks have issued CoCo bonds in order to bolster their capital ratios. Following the EU pattern, CoCos issues have become increasingly popular within banks in Asia and the Pacific. The EU regulatory treatment of the contingent convertibles issued by banks and insurers together with bank bail-in instruments is at the forefront of the book. Furthermore, the book provides an overview of hybrids pricing and risk assessment approach and covers the non-voting preferred stocks as another hybrids class.

Inhaltsverzeichnis

Frontmatter

1. Contingent Convertibles Issued by EEA Banks

Abstract
This Chapter offers an insight into contingent convertibles (CoCos) issued by European Economic Area (EEA) banks. First, we introduce the Basel I and II capital instruments and how they evolved into Additional Tier 1 (AT1) CoCos under Basel III Capital Accord. The main focus is on the detailed characteristics of the AT1 CoCos. This research is combined with basic analysis of EEA banks’ capital data, as it is crucial to assess risks of trigger event, coupon cancellation and call extension. Then we investigate AT1s with regard to the banks’ cost of capital. Finally, we present the CoCos classified as Tier 2 bank regulatory capital.
Marcin Liberadzki, Kamil Liberadzki

2. CoCo Bonds and Bail-in Mechanism

Abstract
In addition to automatic trigger mechanism based on regulatory capital ratio level, European Union’s (EU) competent resolution authorities are granted discretionary power to start write-down or conversion of contingent convertibles (CoCos) and determine its exact scope on reaching the point of non-viability (PONV) that marks an institution is ‘failing or likely to fail’. These two trigger mechanisms are effective parallelly and their interrelation is subject of detailed study in this chapter. The PONV loss-absorption mechanism that came with the new EU’s resolution regime in 2014 is a determinant for the whole ‘bail-in’ bonds class. In this chapter, we examine the subordinated bail-in bonds in the form of Tier 2 and new class of non-preferred senior instruments. The general concept of bail-in bonds led to the introduction of total loss-absorption capacity (TLAC) for globally systemically important banks and minimum requirement for own funds and eligible liabilities (MREL) for all EU banks in 2014, which is referred to in this chapter.
Marcin Liberadzki, Kamil Liberadzki

3. The Contingent Convertibles Pricing Models: CoCos Credit Spread Analysis

Abstract
The Additional Tier 1 contingent convertibles (AT1 CoCos) credit spread calculation is a challenging task considering numerous clauses embedded in this security. Apart from risk of trigger event occurrence, holders of AT1 CoCos are exposed to risks of coupon cancellation and call extension. The CoCos complexity is amplified by the fact that the triggering may be caused not only by the occurrence of contractually determined trigger events, but also by the behaviour of the supervision or resolution authority. In this chapter, the CoCo pricing models have been classified into market and structural models. The most prominent among the market models are credit derivatives and equity derivatives model. This chapter presents these models together with the implied CET1 volatility model in a more detailed manner as an example of structural approach. Final sections present our empirical analysis using a dozen of regressors for explaining ‘spread to Tier 2’ observable values.
Marcin Liberadzki, Kamil Liberadzki

4. Non-EEA Banks’ and Insurers’ CoCos

Abstract
In this chapter, we present contingent convertibles (CoCos) issued by non-European Economic Area (EEA), countries’ banks for the same purposes of fulfilling Basel III regulatory capital requirements. These are: Switzerland and some Asia-Pacific countries, most notably China, Singapore, Korea and Japan. The focus is on underlining the main differences between EEA banks’ and non-EEA banks’ CoCos. We then look into insurers’ Tier 1 Solvency II regulatory package compliant CoCo bonds. We compare banks’ with insurers’ CoCos characteristics. We then compare Tier 2 bonds issued by insurers with those issued by banks. This chapter concludes with presenting the main features of insurers’ Tier 3 bonds.
Marcin Liberadzki, Kamil Liberadzki

5. Corporate Hybrid Securities and Preferred Shares

Abstract
This chapter is on corporate hybrid securities, namely hybrids issued by non-financials, that is, other than banks and insurers. We concentrate on the market performance of hybrids issued by Volkswagen in the scenario of a corporate governance scandal that broke out in September 2015. Then, we take broader look at the non-voting preference shares. We analyse the various types of preferreds including convertible and convertible exchangeable preferred stock, participating preferred shares and trust preferred stock. The final part of this chapter is fully devoted to preferreds issued by US banks to fulfil the Basel III regulatory AT1 capital requirements under the Dodd-Frank rules.
Marcin Liberadzki, Kamil Liberadzki

Backmatter

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