PIMCO, the world’s largest bond fund manager, is launching a product designed to cash in on a new breed of hybrid securities dubbed “CoCos” being issued by banks.
Contingent convertibles, known as CoCos, are securities that convert to equity if a measure of financial strength is broken. They are deemed to be a tougher form of funding for banks during periods of financial stress.
Pimco is hoping to tap the emerging market for CoCos, and believes it could become a $500bn (£310bn) asset class.
Fleming Family & Partners, which is owned by one of the oldest banking family dynasties, has provided seed capital for the launch of the new fund, which will invest in high yield debt issued by banks, including CoCos, as well as existing Tier 1 debt. The investment house, which holds assets under management of £4bn, provided the initial capital to establish the fund and developed the investment strategy for the fund in conjunction with Pimco.
The fund is designed to offer a high yield to investors and relative capital security. It could also attempt to tap pricing imperfections in the fledgling CoCo market.
The securities debuted following the financial crisis, after they were viewed as a more stable form of funding for banks. British lender Lloyds was the first bank to issue CoCo bonds in 2009. Since then, Swiss bank Credit Suisse and Dutch lender Rabobank have also issued the securities.
CoCo issuance is expected to pick up as banks look to meet tough new capital ratio requirements being drawn up by European regulators.
The securities are expected to become a form of Tier 1 funding under the new Basel III rules.