Banks may reduce issuance of bonds designed to bolster equity in a crisis because they offer few advantages over traditional capital securities, according to analysts at CreditSights Inc.
Contingent capital notes, which pay coupons of as much as 9 percent, are growing relatively more expensive as bank regulators insist bondholders contribute to bailouts, Simon Adamson and John Raymond in London wrote in a report. The notes are no longer that much riskier than traditional dated subordinated bonds that pay lower interest, the analysts said.
“When these were thought up, the idea of impairing bonds before a collapse was pretty much unthinkable,” Adamson said in a telephone interview. “
These days, instruments like these don’t seem so different because most bank securities are going to be subject to some form of bail-in.”
Contingent capital bonds are designed either to convert to equity or be written down when capital ratios fall below a preset level, typically 5 percent and 7 percent. As regulators increase capital requirements for banks, raising the level when conversion takes place, “higher trigger bonds will be more difficult to sell and might be prohibitively expensive,” according to the report.
Adamson said he expects some issuance to continue in what is “likely to be a limited market.”
Sales may come from lenders seeking to meet Tier 1 capital ratios, the first layer to be impaired in a crisis, according to CreditSights.
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