CoCos (AT1) versus capital (CET1) at Spanish and European banks
Fecha: noviembre 2019
A.F.I., Ángel Berges, Javier Pino, Alfonso Pelayo
Banca, CoCos, Recursos propios, Solvencia, Perfil de riesgo
Contingent convertible bonds (CoCos) have emerged as one of the most popular instruments for recapitalisation in the European banking sector. In Spain alone, the 22 billion euros of CoCos issued over the last five years account for around 60% of Spanish banks’ capital-raising efforts. From the banks’ perspective, CoCos are an attractive funding instrument given their tier 1 status. For investors, these bonds’ appeal is undoubtedly driven by the fact that they have substantially outperformed issuers’ ordinary shares. That said, CoCos stand out for their dichotomous nature, underpinned by the two financial options they provide for issuers -prepayment and conversion. These options offer a distinctly asymmetric performance for investors depending on the issuer’s financial health. Under normal conditions, the bonds generate attractive returns for investors; however, in the event of recapitalisation, CoCo buyers stand to lose their entire investment. In analysing the main factors behind a CoCo’s coupon value, it was determined that this value is correlated to measures of financial health, such as Tier 1 capital adequacy (CET1), risk profiles (RWA/TA) and banks’ price-to-book values (PBV), with the combination of the latter two variables increasing in statistical significance.