CoCos hit by new prospectus regime

Author: Lizzie Meager | Published: 23 Mar 2016

European regulators’ proposed new rules on debt prospectuses could unintentionally discourage issuance of contingent convertible instruments (CoCos).

Regulation aside, the instrument has had a hard time of late. CoCos, or AT1s, issued by Deutsche Bank lost almost 25% in February as investors panicked it would be unable to service its debts. These fears were possibly unwarranted, with a plausible explanation being that investors just don’t understand how they work – but the rating agencies still refuse to budge.

But these are the instruments regulators encouraged banks to issue post-crisis, to rebuild the capital lost during the downturn. "To the extent issuers wish or need to increase their regulatory capital in the form of CoCos, the proposed new regime could cause them a real headache," said Charlotte Bellamy, director at the International Capital Market Association (ICMA).

As the rules are at an early stage, the consultation is still open and...