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New Barclays index seen boosting CoCo market
June 11, 2014 / 9:48 PM / 3 years ago

New Barclays index seen boosting CoCo market

* UK bank to include euro, dollar, sterling and Swiss franc bonds

* Investment and junk rated bonds to be tracked

By Aimee Donnellan

LONDON, June 11 (IFR) - A new global index from Barclays to gauge the performance of contingent convertible (CoCo) bonds should widen their appeal and inject more transparency into the riskiest form of bank debt.

The index, which follows a similar product launched by Bank of America Merrill Lynch in January, will contain 65 CoCos that could either convert to equity or be written down to nothing if a bank hits a predefined trigger.

“CoCo issuance has steadily grown in recent years and we anticipate further expansion of this market, as financial institutions issue these bonds to help achieve required regulatory capital ratios,” said Brian Upbin, head of benchmark index research at Barclays.

“Though CoCos are not eligible for broad-based bond indices such as the global aggregate, there are debt investors who hold these securities as out-of-index investments and need a benchmark of asset class risk and returns,” he said.

Since Lloyds issued the first CoCo at the end of 2009, market participants have argued that an index is needed for the sector to expand.

According to Citigroup estimates, European banks will be incentivised to issue around EUR248bn of Additional Tier 1 debt and EUR266bn of Tier 2 to meet capital requirements imposed by CRD4. For 2014, the bank estimates, AT1 and Tier 2 issuance could reach EUR20bn and EUR45bn respectively.

The bulk of the bonds in the new index, 88%, were originated by European banks, with the remainder from Latin American and US lenders.

As is the case with many Barclays indices, bonds included will have to have a minimum size of USD300m, EUR300m, CHF300m, AUD300m, CAD300m, GBP200m or JPY35bn. A host of other currencies will also be eligible for the index, which has a market value of USD98bn as of May 31 2014.

Barclays plans to exclude securities with conversion features based solely on the discretion of local regulators, those that have an additional equity conversion option based on regulatory or solvency criteria, inflation-linked bonds and floating-rate issues, private placements and retail bonds, and illiquid securities with no available internal or third-party pricing source.

US dollar-denominated bonds currently account for over half the index at 58.7%. Euro deals follow with 29.2%, sterling stands at 9.6% and Swiss francs make up 2.5%.

While the ratings of the bonds included range from Aaa to Caa, the highest proportion are rated BB, or just a notch just below investment grade.

Barclays is evaluating the quality of the bonds using the middle rating of Moody‘s, S&P and Fitch; when a rating from only two agencies is available, the lower will be used.

Contingent capital bonds that are converted to equity or have been written down (either fully or partially) will exit the index at month-end rebalancing.

The Barclays index will track hybrid capital securities that do not qualify for other high-yield, capital securities or convertible indices. (Reporting by Aimee Donnellan; Editing by Shankar Ramakrishnan and Marc Carnegie)

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