Global banks’ issuance of contingent capital instruments (CoCos) is down by about 44% so far this year, according to a new report from New York-based credit-rating agency Moody’s Investors Service Inc.
The issuance of CoCos is down to US$76.8 billion during the first nine months of 2015, down significantly from its peak of US$175 billion in 2014, the Moody’s report says. Banks have been issuing CoCos in the past few years to help them meet their risk-based capital and supplementary leverage requirements under Basel III requirements. Furthermore, CoCos appeal to investors by offering relatively high yields, the report notes.
However, the issuance volumes dropped between May and August due to weak market conditions associated with Greece’s debt crisis, concerns about China’s economic growth and uncertainty surrounding an interest rate hike by the U.S. Federal Reserve Board, the Moody’s report says.
“At the current trend, we expect 2015 issuance to be well below the 2014 level. On an annualized basis, issuance for the full year 2015 would total about US$106 billion compared with US$175 billion the previous year,” says Barbara Havlicek, senior vice president of Moody’s hybrid capital group.
Chinese banks continue to lead issuance of CoCos, accounting for 26% of the value of global CoCos issued since the beginning of the year, the report says. In addition, it reports that quite a few Japanese banks also came to market with Tier 2 CoCos from May through July, “supported by low levels of credit costs and loan growth driven by overseas expansion.”