Bloomberg News

U.K. Banks’ CoCo Bonds Fall After BOE Warns on Losses

June 26, 2014

Contingent capital bonds issued by U.K. banks fell after the Bank of England said investors may be underestimating the likelihood of losses.

Barclays Plc’s 698 million pounds ($1.2 billion) of undated 7 percent notes issued June 13 declined 1.25 pence on the pound to 100.01 pence to yield 7 percent, according to Bloomberg generic prices. The move came after the central bank said today in its Financial Stability Report that undisclosed capital requirements may mean a lender is closer to being obliged to suspend coupon payments than holders may realize.

The notes, known as additional Tier 1 bonds, are banks’ riskiest debt securities because before losses cause conversion to equity or a writedown, regulators can force issuers to conserve capital by suspending coupon payments. Investors have spurred issuance of the notes, which yield as much as 11.5 percent (POP), to almost $50 billion in Europe since the market opened in April last year.

“Potentially, the Bank of England might want to send a signal to the market that it’s worried about pricing,” said Steve Hussey, an analyst at AllianceBernstein Ltd. in London, which manages about $445 billion. “They’re probably flagging something that might lead to instability. I’d expect them to be monitoring things pretty closely.”

CoCo bonds issued by U.K. banks trigger when capital falls to 7 percent of assets weighted by risk and Barclays would need to burn through about 11 billion pounds before the notes would convert, Hussey said.

Regulators can impose additional capital requirements on individual banks to cover specific risks, under rules known as Pillar 2A, the Bank of England said. Those extra demands don’t have to be disclosed and may mean the issuer is closer to having to suspend coupon payments than investors are aware, the central bank said.

Nationwide Building Society’s 1 billion pounds of 6.875 percent debt issued March 4 fell 0.15 pence to 103.03 pence on the pound, according to data compiled by Bloomberg.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Chapin Wright


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