Wealth Manager - the site for professional investment managers

Register for full access to Citywire’s Fund Manager database, news and analysis. Registration is free and only takes a minute.

Ex-BoE adviser warns of massive CoCo pop

3 comments
Ex-BoE adviser warns of massive CoCo pop

Peter Hahn, former senior adviser to the Bank of England, has argued that bond managers piling into contingent convertible (CoCo) bonds will not be protected by focusing on higher quality issuers.

James Vokins, the Citywire A-rated manager of the Aviva Investors Distribution fund, has noted that order books for such bank debt – which can be converted into equity – are often 10 times oversubscribed.

According to Stephen Thariyan, the AA-rated manager of the Henderson Sterling Bond fund, a third of the £33 billion that European banks need to raise this year will be in CoCo form.

Investors have been attracted to such bonds by yields of 6-7% and spreads four times above senior debt, even from strong banks like Barclays, Pimco fixed income specialist Flavio Carpenzano has explained.

But while many have acknowledged the risks inherent in CoCos, Hahn has claimed that even the supposedly safest issuance is dangerous. He recalled the actions of the US during the crash, when through the troubled asset relief program it required the recapitalisation of all banks – not just the weakest.

‘As soon as a major European bank, or some significant percentage of banking provision, appears unstable the incentive or temptation for regulators to cause across-the-board CoCo conversion will be the market talk,’ said Hahn.

‘And why not? Why would regulators want to wait? Wasn’t the lesson of 2008-2009 big swift systemic action?’

Hahn, currently a lecturer at Cass Business School, added that the next European banking crisis could therefore be ‘just so much messier than the continuing one’ due to this ‘new form of Frankenstein bond/equity directly encouraged by regulators and national treasuries’ becoming the ‘must-have product of 2014 and perhaps disaster of 2019’.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Investment Pulse: the highs and lows of 2014

Investment Pulse: the highs and lows of 2014

This week's Investment Pulse looks back at some of the biggest stories of the year as well as looking forward to 2015.

Play Inside ETFs: Why the US bull-run still has legs

Inside ETFs: Why the US bull-run still has legs

Global equities suffered a sharp sell-off in the third quarter but exchange traded fund investors are continuing to back the US to outperform in 2015

Play Paul Niven: I won't rip up the Foreign & Colonial Trust history book

Paul Niven: I won't rip up the Foreign & Colonial Trust history book

The newly appointed manager of the Foreign & Colonial trust talks about his plans for UK's oldest investment company.

Your Business: Cover Star Club

Manchester wealth firm hires Coutts director for London launch

Manchester wealth firm hires Coutts director for London launch

Former Coutts director Tony Robinson has joined Chartered Wealth Management to head the company’s newly opened London office.

Wealth Manager on Twitter