CS is Cuckoo for CoCos
Credit Suisse’s chief executive said he hoped to begin issuing billions of dollars in contingent-capital bonds in the next year to help shore up the bank’s financial strength well ahead of new Swiss regulations.
While Credit Suisse has until 2019 to meet new contingent capital rules, Mr Dougan told the Financial Times that he would aim to issue so-called “coco” bonds soon to assure investors and regulators that there was adequate demand for the debt.
“I certainly hope that during the course of next year we can do something,” he said. “We’ve actually received a lot of reverse inquiries that said ‘If you’re going to issue these we’d be very interested in looking at them’.”
The bank may issue as much as $30 billion in cocos over several years to replace a portfolio of hybrid securities that will no longer qualify as capital under new Basel committee rules.
The bonds convert into equity or other capital if a bank’s financial strength begins to crack. Although investors will demand higher interest rates than for more senior debt, the bonds’ tax-deductible status makes them cheaper than common equity. Switzerland is the only country so far to have publicly backed their use in its efforts to force systemically important banks to hold far greater cushions against losses.
First and foremost, a real market has to develop for the product. While we have seen the one off issuance, this is not a trading market at this juncture. I do believe, however, that this will be the next "hybrid" security.
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