Weak markets sees fewer CoCos issued in 2015

Global issuance volume of contingent capital securities, aka CoCos, fell sharply by 42% last year from 2014, but remained dominated by Asian – particularly Chinese – and European banks, said Moody’s Investors Service.

The credit ratings agency (CRA) reports that the fall to US$101bn from US$175bn was due largely to lower issuance by Chinese banks – driven by persistently weak market conditions and a slower pace of balance sheet growth that may have reduced their short-term capital requirements.

In addition, 76% of global issuance comprised Additional Tier 1 (AT1) CoCos mainly subject to principal write-down with discretionary triggers, while the remaining 24% was Tier 2.

Over 2015, Asian banks accounted for 48% of issuance and European banks 40%, largely reflecting the progress regulators in these two regions have made in implementing Basel III regulatory capital requirements, reports Moody’s.

In Asia, banks – particularly China institutions – have issued CoCos to fund rapid balance sheet growth and to meet capital requirements in jurisdictions that have made progress in early adoption of the Basel III capital framework.

By comparison, many European banks – taking advantage of the relatively low costs associated with CoCos compared to common equity – had turned to the instruments to shore up their capital ahead of regulatory stress tests in 2014.

CoCo issuance also continues to be concentrated among a group of large banks. The top 10 issuers are five European and four Chinese banks, plus one Australian, which account for 37% of all issuance since 2009.

Although the base of CoCo issuers has widened in recent months, Moody’s predicts that this concentration among the top 10 issuers will persist as the largest globally active institutions have to meet significantly higher capital requirements and buffers under Basel III and respective national and regional regulatory frameworks.


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