Bank CoCo revival displays a healthy exuberance

Bank of Cyprus Holdings

14/06/2023 11:19

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are their own. Updates to add chart.)
       LONDON, June 14 (Reuters Breakingviews) - Funky bank
debt is back. BBVA  BBVA.MC  and Bank of Cyprus  BOCH.CY  on
Tuesday both issued Additional Tier 1 (AT1) securities,
quasi-equity instruments that turn into equity or get wiped out
in a crisis. It puts paid to fears that the asset class, also
known as contingent capital or CoCos, would be permanently
impaired. Swiss regulators spooked investors in March by passing
an emergency law to burn Credit Suisse bondholders while sparing
shareholders.
    The average yield on CoCos has dropped to 8.2% from more
than 10% in late March, according to an ICE BofA index
 .MERCOCO . The falling borrowing cost means many lenders can
afford to replace outstanding bonds with new ones at the
earliest opportunity. That pleases AT1 investors, who largely
bought the instruments expecting to get their money back after a
few years. BBVA’s new bonds yield 8.375%, which is lower than
the old ones it is replacing, according to CreditSights.
    Nor does the market look too toppy. The overall extra
return, or spread, that investors expect to earn for buying AT1
debt over equivalent risk-free rates is 437 basis points, per
the same ICE BofA index. That’s up from as little as 350 basis
points in February, suggesting greater buyer wariness. And the
market seems discerning. Bank of Cyprus’s bond  XS2638438510= 
carried an eye-popping 11.875% coupon. Bonds issued by UBS
 UBSG.S  with a call in 2027 yield over 11%  902613AJ7= ,
according to Refinitiv data. AT1 investors are back, but have
not forgotten the recent pain. (By Neil Unmack)
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 (Editing by Liam Proud and Pranav Kiran)
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