We have been warning a long time ago about CoCo bonds because eventually they could be converted into stocks or not paid back. Here is an example of the real face of CoCo Bonds. Basically the text below says Banco Santander will skip an option to call the bonds. In other words they won't be paid back on the first maturity. They will be rolled over.
By not redeeming, Santander will leave the bonds outstanding, but switch from a fixed rate to a lower floating coupon rate. That will allow it to end up paying a lower coupon on the debt, 5.54%, than it would by issuing new bonds.
The decision to skip the call may drive up costs across the market for the regulatory-driven bank bonds as investors have traditionally priced CoCo bonds in the expectation that they will be called at the first opportunity.
The skip may tempt other banks to follow suit, presenting a looming market risk as the number of AT1s with low post-extension rates approaching their
first call dates will pick up into next year.
"MADRID, Feb 12 (Reuters) - Banco Santander on Tuesday opted not to call a 1.5 billion euro ($1.7 billion) additional tier one (AT1) bond once the deadline expired, becoming the first European lender not to redeem this kind of hybrid debt that can be converted into equity.
When making call judgments we have an obligation to assess the economics and balance the interests of all investors. We will continue to monitor the market closely and will seek to exercise call options where we believe it is right to do so," Santander said in a statement.
Santander's contingent convertible (CoCo) was eligible to be called on Tuesday and recent confusion over whether the Spanish lender would redeem the bond had caused wild swings in the bond's price.
Bankers warned that the Santander non-call may incentivise other issuers with low reset credit spreads to follow the Santander route, meaning investors may not be paid back."
Here is what we wrote 2 years ago:
What are Coco Bonds? Coco bonds, Cocos or contingent convertible notes are slightly different to regular convertible bonds in that the likelihood of the bonds converting to equity is contingent on a special event, such as the stock price of the company exceeding a particular level for a certain period of time. They do not have to be included in a company's diluted earnings per share until the bonds are eligible for conversion. The bonds usually allow a bank to either hold on to the capital past the first repayment debt, or to skip paying interest coupons on the notes. With this hybrid debt vehicle the bonds can be written off or converted into equity (the share price of the company will then have lost already a lot) to bolster the bank's capital cushion.
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