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Have credit investors gone cuckoo for cocos?

Home / Spectrum / Have credit investors gone cuckoo for cocos?

Filippo Alloatti, Senior Credit Analyst
05 June 2014
Credit

The hybrid securities – formally known as contingent convertible bonds – are flexible, liquid, and intended to stave off future European banking crises. Abundant issuance, combined with high yields and the regulator’s blessing, is rapidly driving the market for the securities higher.

But amid this craze for cocos, we believe the risks of the complex instruments are being mispriced:

  • Trigger points for conversion to equity are closer than they seem
  • Coupon cancellation is a genuine threat
  • Potential for a sell off when a coco is triggered and risk appetite fades

We analyse these risks, and canvass relative-value investment opportunities arising from the growth of the coco market, in the June issue of our monthly commentary, Spectrum: global credit insights.

Read the full commentary.

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Filippo Alloatti Senior Credit Analyst Filippo joined Hermes in 2011 as a senior credit analyst on the Hermes Credit team and specialises in European and US financials. Prior to this he served in a similar capacity at Fortis Investments in the global credit and hybrids group and subsequently at BNP Paribas Asset Management in Paris. Other roles at Fortis included securitisation analyst and regulated utilities and property analyst. Filippo began his career in Germany at Sal Oppenheim & Cie and Berenberg Bank, where he was responsible for derivatives trading and M&A financing. Filippo holds a Bachelor’s degree in Economics & Business Administration from the Universita’ La Sapienza in Rome.
Read all articles by Filippo Alloatti

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