The future of CoCo Bonds protection instruments

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When assessing the future of our surety product “CoCo Bonds Investors Guarantee”, our financial team reviewed the market developments in 2016. Initially in 2016 there had been a slowdown in the new issuance of CoCo Bonds, however this changed when three UK banks issued $6bn of new CoCo Bonds in August (Standard Chartered, Royal Bank of Scotland and Barclays) and these new issues attracted strong demand from investors.That appetite for CoCo Bonds arrives after a recovery in the secondary market as well.

Where has the investors’ appetite come from? CoCo Bonds are designed to transfer the risk of a financial institution failing from governments to bondholders thus removing the risk of a bailout that scared taxpayers during the financial crisis. AS compensation for taking this risk, buyers are offered higher levels of return. In current market conditions, where interest rates are so low it helps the recent recovery of and investor demand for CoCo Bonds.

Royal Bank of Scotland’s latest CoCo Bond was issued with a rating of single B from S&P and a coupon of 8.625%. The combination of a well-known issuer with a high yield seems like a magical formula for a successful distribution of the bonds in the market.

The issue faced by our financial team is the validity of the surety product (the investors’ guarantee) in the 2017 financial arena. The recovery of the CoCo Bonds markets (primary and secondary) seems to validate the necessity of this product to the potential (and existing) investors in CoCo Bonds, and therefore, it was recommended to our surety underwriters to continue offering the product in 2017.