There is growing interest in global banks selling Contingent
convertible bonds (Cocos) into the US. Despite no offerings
going through yet,
UBS recently sold into Asia, and others are preparing for
Jeffrey Oakes, head of Davis Polk & Wardwell's European
financial institution group outlined
the options and pitfalls for banks at IFLR's European Capital
Markets forum on April 25.
Some of Europe's largest banks, including UBS, RBS, Deutsche
Bank, Credit Suisse and Santander are registered with the US
Securities & Exchange Commission (SEC), meaning they can
make a public offer of Cocos in the US.
As was the case before the crisis, the banks raised a large
amount of capital through the US retail market. The expectation
is they may do this again with Cocos.
There is good news for these potential issuers. "Because
these banks able to issue Cocos are well-known seasoned
issuers, they will be able to file registration statements that
will become automatically effective," said Oakes.
The nature of the conversion feature in Cocos means that,
pursuant to the registration statement, the banks must register
the host instrument and the underlying shares.
The SEC takes the view that Cocos of the convertible kind will
be viewed as mandatory convertibles.
So the investment decision with respect to the debt
instrument and the shares is made at the time of the initial
purchase, meaning the registration statement will cover both.
"As a result, if at any time the trigger is actually effected,
the shares will be issued and freely tradable," said
One issue likely to arise for SEC-registered deals is from the
Trust Indenture Act. Under US securities law, any
SEC-registered transaction must have a qualified indenture.
Certain provisions within it are mandatory. According to
Oakes, these could potentially create structuring issues
depending on the terms of the security that the respective
issuer's regulator might require.
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