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2019 | OriginalPaper | Chapter

1. Contingent Convertibles Issued by EEA Banks

Authors : Marcin Liberadzki, Kamil Liberadzki

Published in: Contingent Convertible Bonds, Corporate Hybrid Securities and Preferred Shares

Publisher: Springer International Publishing

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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.

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next chapter CoCo Bonds and Bail-in Mechanism

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

Tier 1 capital does not include cumulative preferred stock as it can’t be deemed ‘permanent shareholders’ equity’ according to Annex 1.D. BCBS (1988). More on preferred stock see Sect. 5.3 of Chap. 5.

Apart from hybrid capital instruments and subordinated debt, the Tier 2 capital consisted of undisclosed reserves, asset revaluation reserves and general provisions/general loan loss reserves. See Annex 1.A. p. 17 of BCBS (1988).

see BCBS (1988) p. 6 and 19.

See Sect. 1.3.3.4.

See Sect. 2.9 of Chap. 2.

They used ‘COCOs’ abbreviation for contingent convertibles.

See Sect. 1.3.3.3.

However some countries, for instance Norway and Sweden, applied the buffer requirements in full with immediate effect, Italy has implemented the capital conservation buffer with immediate effect.

See Sect. 1.3.3.4.

See Sect. 2.6 of Chap. 2.

In UK Pillar 2 buffer is split into a hard requirement Pillar 2A, which is factored into the MDA calculation (like P2R), and a Guidance amount Pillar 2B, which is not part of the MDA calculation (like P2G).

Commission Delegated Regulation (EU) No 241/2014 of 7 January 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for Own Funds requirements for institutions.

See Sect. 1.3.5.

For more on Tier 2 CoCos see Sect. 1.4.

Three of the issues though had a regulatory call at a make-whole price.

For example HSBC, the HSBC 10.176% perp-30 $900 mn legacy Tier 1 step-up bond. Therefore, a tender or regulatory call after end-2021, and well before 2030, is highly possible.

Total Loss Absorbing Capacity/Minimum Requirement for own funds and Eligible Liabilities. For more on these see Sect. 2.9 of Chap. 2.

For example BNP Paripas NC10 7,375%perp-25, USD (US05565AAN37). One of the rare EUR-denominated is Intesa Sanpaolo NC10 7.750% perp-27 (XS1548475968).

Dividend stoppers and pushers ensure that shareholders will not be able to receive dividends unless the coupon is paid to bondholders. For more on dividend stoppers/pushers and look-back provisions see Sect. 5.1.3 of Chap. 5.

For MDA trigger exact place among other bank’s regulatory triggers see Sect. 2.7 of Chap. 2.

For more on MREL see Sect. 2.9 of Chap. 2.

Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.

Orig. ‘in Ausübung seines freien Ermessens’. See Memorandum §3(8)(a) (Finanzmarktwelt, 2017).

There were three AT1 CoCos issues from DB, all of 20 May 2014: €1.75 billion tranche with a coupon of 6%, $1.25 billion tranche with a coupon of 6.25%, and £650 million tranche with a coupon of 7.125%. All of issues had partial and temporary principal write-down loss-absorption mechanism.

Convertible instruments may be converted into new shares of the same issuer, while exchangeables may be exchanged into existing shares of a company other than the issuer of the bond. The underlying instrument of an exchangeable bond will be a ‘basket’ of already existing and listed securities, see Liberadzki (2016).

For more on reverse convertibles see Liberadzki (2016).

Under Basel III, banks’ equity can still be as low as 3% of banks’ total assets. It is not clear that anything would have been substantially different in the 2007–2009 crisis had Basel III already been in place. See Admati and Hellwig (2013).

See Sect. 4.2.2 of Chap. 4.

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council.

Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent.

The ECB also conducted a parallel stress test of an additional 56 banks under its direct supervision, using the same methodology. This was an internal supervisory exercise conducted by the ECB, which did not publish the results, although some banks chose to publish their own results.

Basel III Monitoring Report, Results of the Cumulative Quantitative Impact Study, Bank for International Settlements, The Basel Committee on Banking Supervision, December 2017.

For more on PONV trigger please refer to Sect. 2.6 of Chap. 2.

1. Risk Assessment of the European Banking System, European Banking Authority, November 2017. 2. Risk Dashboard. Data as of Q4 2017, European Banking Authority.

Risk Assessment of the European Banking System, European Banking Authority, December 2016.

ECB surveillance note on risk and vulnerabilities for the EU financial system, European Central Bank, Directorate General Macroprudential Policy and Financial Stability, 29 November 2018.

Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitization and creating a specific framework for simple, transparent and standardized securitization, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012.

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

Most Tier 2 CoCos are rated in the BBB range while AT1s tend to be rated in the BB range.

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Adamson, S. (2014, February 14). Credit Suisse: T1 Tender Avoids Reg Par Call. CreditSights.

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Title: Contingent Convertibles Issued by EEA Banks
Authors: Marcin Liberadzki
Kamil Liberadzki
Publisher: Springer International Publishing
Book: Contingent Convertible Bonds, Corporate Hybrid Securities and Preferred Shares
Print ISBN: 978-3-319-92500-4

Electronic ISBN: 978-3-319-92501-1

Copyright Year: 2019
DOI: https://doi.org/10.1007/978-3-319-92501-1_1