CFA - Lux 08-10-2014

1

Mouctar BahPhD Candidate

1

Hybrid security:

Debt in normal times

Equity in distressed times

2

What is a Contingent Convertible (CoCo)?

CoCo on Bank Balance Sheet

Assets Debt

Equity

Assets Liabilities

E Market value of equity

FFace

value of debt

VMarket value of

company

Bankruptcy

D Market value of debt

FFace

value of debt

VMarket value of

company

F

Loss given default

3

The anatomy of a CoCo

Trigger

• Accounting • Regulator• Market

Conversion ratio =

ß* N/CP

• Write-down/ UP

• Equity

Conversion price (CP)

• Spot price• Inception price• Average price

4ß [0,1]∈

5

Outstanding CoCos per 30/09/2014 in mio

CHF EUR GBP USD0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Total

6

Monthly issues as of 30/09/2014 (mio EUR)

Dec-09

Mar-10

Jan-11

Feb-11

Nov-11

Feb-12

Mar-12

Jul-12

Aug-12

Nov-12

Jan-13

Apr-13

May-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Sep-14

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

T2

T1

Senior

7

CET1 triggers as of 30/09/2014 (mio EUR)

Senior T1 T20

10000

20000

30000

40000

50000

60000

8,125%

8,000%

7,000%

5,125%

5,000%

8

Loss-absorption mechanism as of 30/09/2014 (mio EUR)

Senior T1 T20.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Full Principal writedown

Progressive Principal writedown

Partial Principal writedown

Temporary writedown/writeup

Equity conversion

9

CoCo Banks as of 30/09/2014 (mio EUR)

ACAFP

BACR

BBVASMBKIR

COVBS CS

DANBNK DB

HSBCKBC

LLOYDS

NDASS

NWID

E

NYKRE

POPSM

RABOBK

SANTAN

SOCGENUBS

UCGIM0

2000

4000

6000

8000

10000

12000

14000

16000

18000

T2

T1

Senior

10

Combined Buffer Requirement (CRD4)

Maximum Distributable Amount (MDA)!!!

CB

R

CET1 = 5.125% or Regulator Decision

SNS Reaal CET1 8.8% per 3Q12

BES CET1 11,3% per 30/06/2014

As from 2015 all subs = Bail-in @PONV

11

Tier 2 = Gone Concern Capital (CRD4)

12

CoCo Investors (by FT)

13

BofA ML poll on T1 CoCo Valuation

14

T1 CoCos: Yields vs Cost of Equity

15

CoCo spread vs Other high-beta FI

ECB

BES

16

SANTANDER 6,25% CoCo vs Its EQUITY

FCA

17

Are the current CoCo designs the solution to the “Too Big To Fail” issue??