View Full Version : Euro markets: CoCo bonds

10-22-2014, 09:17 AM

It's a stock. It's a bond. No, it's both.

This instrument is in response to the pending 2019 adoption of Basel 3.

Regulators cleared the way for the new class of CoCos because they set the stage for bondholders - rather than taxpayers to share the pain of bank writedowns and gave lenders a cheap way to raise new funds without diluting existing shareholdings. While the securities are technically bonds (and thus payments can be made from pretax earnings), they display many of the properties of an equity, and can even upend the traditional pecking order that bondholders get paid before shareholders in the event of bankruptcy.


10-22-2014, 10:07 AM
Allegedly, this is supposed to put the bailout burden on borrowers as opposed to the taxpayers.

The big question is who will buy these? The piece states Hedge Funds and Insurance Companies. Would these two entities really invest huge sums on a product that seems very risky, as the banks can suspend payments, when in trouble. My guess is that the real buyers will be other banks.

Reading between the lines, it seems like Cocos give the ECB more power. When these instruments blow up, the ECB will be the buyer of last resort, and the taxpayers end up paying, anyway, in the form of a devalued Euro.

10-22-2014, 05:10 PM
This seems more like a variation on a theme as opposed to something new under the sun. Convertible bonds have been around since the 19th century. Ditto preferred equities. Both have led to wealth and ruin in the past. I'm sure that will remain true.

If the article says hedge funds and insurance companies are primary purchasers, I wouldn't doubt that. They will likely make up a minuscule proportion of any single purchasers overall portfolio.

Bonds are the one portion of my portfolio where I'm willing to pay a significant management fee. I'm not willing to get down in the trenches on these complicated instruments. I pay my 1.5% and pray the guys I hired are marginally smarter than I am.

10-22-2014, 05:21 PM
It seems like the bond market is set up so that the only way for retail investors to participate is via bond funds.

10-22-2014, 06:36 PM
It seems like the bond market is set up so that the only way for retail investors to participate is via bond funds.

Yep. My preference is closed end so when the panic selling starts the managers aren't forced to liquidate assets into that market. Of course that means I'm leveraged.

I think the little dip we just had in equities is nothing compared to what the bond funds I hold will go through next year. Not looking forward to the sell off but ready to sit through it.