Alternative asset manager Algebris Investments is to launch what it says is the first fund to invest in contingent convertible (CoCo) bonds, a new type of hybrid bond that turns into equity under certain conditions. The Basel Committee of banking regulators is looking at so-called CoCo bonds as a way to boost loss absorbency for large banks and will come up with formal proposals for their use this year.
"As far as we know, we will be the first to launch such a fund," Algebris partner Alessandro Lasagna told Reuters in an interview on February 07.
"We will certainly not be the only ones because, despite the complexities and the scepticism, the point is that an historical change is taking place and regulators and central banks are those who want it to happen".
Some of Europe's big banks are preparing to issue billions of euros of CoCos when they get clarity from regulators. Credit Suisse, for example, could even start issuing them this year. But CoCos have had a cool reception from investors. British bank Lloyds and Dutch bank Rabobank are the only banks to tap the market with these new instruments.
Contingent capital or convertible instruments convert to equity or their value gets written down when the issuing bank hits a certain trigger, such as the decline in its capital ratio below a given threshold.
Uncertainty surrounding this trigger point has worried investors and rating agencies. But despite current scepticism, Lasagna said the regulatory push to include new generation hybrid debt in mandatory capital buffers would eventually force major lenders to issue CoCos.
He expects Credit Suisse to be among the first to hit the market and predicted Switzerland's No. 2 bank to issue about 30 billion Swiss francs ($31 billion) in CoCo bonds by 2019. "In the next 18 to 36 months there will be an enormous opportunity arising from the capital strengthening of the financial system that will be done through the issuance of these instruments", Lasagna said.
Ratings agency Standard and Poor's has said banks globally may need to raise as much as $1 trillion of CoCo-style capital over five to 10 years to replace existing debt and bolster balance sheets.
Lasagna said banks would be under pressure to issue before a 2019 deadline for banks to meet new capital rules also for marketing reasons. "Companies will prefer to deal with the investment bank division of banking groups with strong capital positions," he said.
Algebris CoCo fund, a Specialised Investment Fund under Luxembourg legislation, will start premarketing in March and be operational in April but timing will depend on the regulatory authorities.
Algebris manages globally 1.4 billion dollars and has the bulk of its clients in the United States. It already invests in hybrid bonds through its flagship Global Financial Fund.