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.
BNP Paribas fine may have a silver lining for credit investors
Hermes Credit: Coco risks underappreciated