Viewing a single comment thread. View all comments

SeemoarAlpha t1_jcya8b0 wrote

Reply to comment by Brokenthoughts2 in $CS right now … by ScoreIllustrious952

I just read Goldman's note that added more color regarding these so-called "CoCos", and you are correct, they were not the usual type bonds and could be gutted in this circumstance. My conclusion was also correct in that it will now be harder for banks to build their capital base using these types of bonds. Given this event, as Goldman puts it, "will likely lead to a reduced appetite for AT1 bonds and credit spreads will balloon". Or as another analyst put it, "AT1 bonds will now be put in the "bank junk" category and will have to compete with the rest of the high yield corporate market".

3

Brokenthoughts2 t1_jcybpf6 wrote

Correct that’s why I said it’s not “entirely” true! But it will affect the liquidity of banks hence why ECB offered to swap dollars daily as a preemptive measure.

2

SeemoarAlpha t1_jcyhh02 wrote

I'd have to understand the covenants better but at first blush, it would seem these CoCos are time bombs that could very well make a bad situation worse. If holders now know they can get gutted and not just take a haircut, their first impulse would be to convert to common (dilutive) then dump their shares, thus contributing to a downward equity spiral which might spook depositors and a bank run picks up steam. Sure, the CoCos give taxpayers some bailout protection, but as you say, central banks now have to jump into the breach to help with liquidity. So unless I'm missing something, a rethink of these CoCos as contributors to Tier 1 capital should be in order.

1

Brokenthoughts2 t1_jcyl5s9 wrote

Yes should be a good read, fixed income is an interesting space. No in contingent convertible bonds the bonds are only converted to equity in certain triggering events as I mentioned earlier, you as a bond holder do not have any conversion rights. It absolutely has a place in tier 1 capital but their risk return profile needs to be reevaluated considering the Swiss madness and CS management’s greed.

Additionally, they can be callable and in practice most cocos are called back after 5/10 years during periods of low interest rates.

2