Global banks are expected to issue another US$75 billion in contingent convertible bonds (CoCos) this year, which is in line with the amount banks issued in 2016, according to a new report from Moody's Investors Service Inc.
Global issuance of CoCos was up by 5% through the first quarter (Q1) of 2017 vs Q1 2016, totalling US$16 billion, the report states. Banks in Europe and the Asia-Pacific region continued to drive issuance in Q1, with European issuance totalling US$8.5 billion and Asia adding another US$6.8 billion worth of new CoCos.
"Notably, Chinese banks have returned to the market following a six-month hiatus, although the country's four largest banks still have not issued," the Moody's report says. "Banks in Australia, China, Switzerland and the U.K., the top four countries by volume of issuance, all issued more than US$1.5 billion each, and comprised approximately 58% of total Q1 issuance with a combined US$9.3 billion."
Looking ahead, Moody's predicts that banks will issue about the same volume of CoCos for 2017 as they did in 2016.
"Global CoCo volumes in 2017 will likely be along the same lines as last year because, with capital requirements sufficiently fulfilled, banks have less need to load up on capital and have reduced the heavy issuance we saw in 2014 and 2015," says Simon Ainsworth, senior vice president with Moody's, in a statement. "These lower capital needs, as well as a recently introduced ‘junior senior' debt class that gives investors an alternative to CoCos, will keep issuance steady."
Bank issuance of CoCos took off in the wake of the global financial crisis as regulators required banks to beef up their capital levels to guard against taxpayer bailouts.