Pitfalls for SEC-registered banks selling US Cocos

Author: | Published: 25 Apr 2012
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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 US deals.

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 Oakes.

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.

See also

Where the EBA got it wrong over Cocos

The FSB and Deutsche Bank clash over Cocos

Cocos: how agencies will approach hybrids