REGULATORY uncertainty and reluctant ratings agencies are holding up the development of a multi-billion pound market in contingent convertible bonds (cocos).
The UK is ahead of many other nations due to the FSA having approved Lloyds’ cocos issuance in 2009, but banks are still waiting for a signal from the EU.
“Regulatory certainty is what’s needed – Switzerland has got that certainty,” says Bank of America/Merrill Lynch’s Daniel Bell.
Credit Suisse recently issued £5.1bn’s worth of cocos, which are bonds that turn into equity if a bank’s capital ratio falls too low, following approval from Swiss authorities and a Basel III clarification in January.
But many are still waiting for a move by ratings agencies: some investors have mandates that lock them out of investing in instruments that do not have at least two ratings. Fitch is currently the only major agency to rate cocos, with both S&P and Moody’s having so far refused.
Moody’s reasons that the potential for regulatory discretion makes it hard to determine the likelihood of losses, but S&P is in the midst of a consultation with investors on whether and how to rate cocos, suggesting that it could change its policy later this year. And if S&P does change its mind, Moody’s might soon follow. “If it is the only ratings agency not rating them, it would be surprising,” says Bell.