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Tuesday, October 4, 2016

#CoCo #Bonds and #DeutscheBank

Below is a comment from Armstrong Economics about Co-Co bonds and Deutsche Bank:

 

We have been warning investors to stay away from Co-Co bonds for some time because of the high risk.

"Any bail-in is more likely to take place by wiping out its bonds called CoCos, which have no maturity date. Indeed, investors may never get their money back. Under the terms, the bank can redeem them, usually after five years if it wants to. The annual coupon payments are contingent on the bank's ability to keep its capital above certain critical threshold levels. If the bank's capital falls below that threshold, the bank won't make the coupon payment. Investors cannot call a default on these bonds, and that sets them up for a bail-in. Investors are simply sitting on bonds that they bought because they had a 6% coupon. However, there is not maturity and no guarantee of redemption and if capital falls below the threshold they plunged in value and pay no coupon. Consequently, if regulators deem that the bank is failing, then these CoCos will be bailed-in by either being converted into declining values in shares or could be just canceled.

These 6% CoCo notes traded as high as 104 cents on the euro in early 2014 shortly after they'd been issued, and plunged to about 70 cents and are trading in the 77 level in this latest crisis. Therefore, the CoCos are a good indication of public confidence; for if investors believe those thresholds are approaching, the bank will not pay the coupon and the risk of being converted to shares rises. Of course, converting to shares at any value could be a blessing in disguise since shares can be sold."

 


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