CoCo Bonds (Contingent Convertible bonds) - YouTube

One good thing about a crisis is that a crisis changes things.

That is especially true for the 2008 global financial crisis.

Government and regulators had no choice but to bail out many institutions globally

during that period with taxpayers’ money.

They had to review the whole process and improve it.

They invented and introduced many new measures hoping that in the future,

when financial institutions are in distress,

firms can be orderly wound down or the loss will be taken by stakeholders rather than taxpayers,

so the whole financial system will remain intact.

CoCo is one of these measures; an important one.

CoCo is short for contingent convertible.

They are the securities that will absorb losses in accordance with their contractual terms

when the capital ratio of the issuing bank falls below a certain level;

usually 5.125% which is lower trigger and 7% which is high trigger.

Most CoCo bonds also have the statutory bail-in clause

either in their terms and conditions or in the risk factors of the prospectus,

which means relevant authorities have the power to impose losses on CoCo holders

even if the trigger level has not been breached.

How the authority determines the bail in can’t be predicted and there is no available formula.

There are three different ways for CoCo Bond to absorb losses:

convert to equity, permanent write-down and temporary write-down.

Beside the contingent feature, there are other important features for CoCo.

CoCo bonds can be senior bond, can be a Tier 2 bond, but most of them are Additional Tier 1.

For almost all Additional Tier 1 CoCo, the issuer has sole discretion to pay the coupon.

There are also some circumstances including an insufficient distributable item

or payments exceed the maximum distributable amount,

so that even if the issuer would prefer to pay the coupon,

they are prevented from doing so.

A cancelled coupon is non-cumulative.

So if CoCo holders can’t receive interest,

it can have a large impact on the value of the security

as most CoCo bonds have a perpetual maturity structure.

Like many other bonds, a CoCo generally is a callable bond.

The difference with a CoCo is if an issuer intends to call the bond back,

CoCo issuers must get consent from their respective regulators.

Again, there is no formula to predict if the regulator will give their approval or not.

Other than regular redemption, most CoCo bonds give the issuer the option to redeem the bond at par

if there is tax event, capital event or rating event,

or CoCo issuer has the flexibility to substitute or vary the contractual terms

without prior consent from CoCo holders.

All these add to the complexity of CoCo Bonds.

CoCo provides investors, regulators, researchers and other professional firms valuable information

to assess global banks’ health.

It is a useful tool to analyze banks, leverage and the economy.

All the players in the financial markets should understand the instruments.

But it is not easy.

To understand CoCo, researchers have to go through the complex contractual terms

and to go through the complex financial results of the issuing bank.

To make things worse, as a new asset class,

the accounting treatment,

its rating methodology,

Issuers’ pillar II capital requirement

and other legal issues are not fully established yet and also not tested.

These uncertain external factors make CoCo an even harder object.

To solve these problems, we developed this app.

It is called "CoCo Monitor".

In CoCo Monitor, we standardize CoCo notes and issuers’ information.

With this app, our subscribers can gain access to the valuable information

anytime anywhere with their mobile.

Take CS 5.75 09/18/25 as an example.

You can see on the top of page is the market price of this note.

App users can set up a price alert here.

For example, you can set up a bid price target 103.

So when the bid price reaches 103,

we will inform you via mobile push-through.

Not only standardized information, we also provide users the specific information on each CoCO note.

You can see here in the "General Information" that,

although CS 5.75 Perp is issued out of Credit Suisse Bank,

the trigger mechanism is actually linked to Credit Suisse Group.

So it is the Credit Suisse Group that investors should monitor.

It is a big difference between Credit Suisse Bank and Credit Suisse Group.

In the "Trigger and Loss Absorption" area,

we have a "Distance to Trigger" alert,

which enable subscribers to set up a predetermined alert level.

Let’s say users set a level 8%, 300bps above the trigger level 5%.

So when Credit Suisse Group CET1 ratio drops close to 8%,

we will inform our users and remind them of the risk be permanent write-down.

You can also take a note on each bond page.

So you can review it anytime you want.

If you want to get the prospectus of CS 5.75 Perp,

just click the button below and confirm your email and we will email you the prospectus

for you to take a close look at the contract yourself.

After reviewing the bond page, users can go to the issuer page.

In this case, it is Credit Suisse Group page.

In the "Latest Result" area, you can see the latest quarter results .

One thing you need to know is the basis of these numbers.

Are they fully-loaded numbers or transitional numbers.

It makes a lot of difference.

Because some CoCo bond triggers are calculated based on fully-loaded CET1 ratio like HSBC and Nordea

while others are calculated based on phased-in CET1 ratio.

By clicking the chart icon, users will be able to see historical data.

For example, if you click the CET1 ratio chart icon,

you will see the curve on Credit Suisse Group CET1 ratio from Q1 2014.

Below the "Latest Result", there is regulation information.

Users will see the capital requirement from the relevant authorities.

This is very important to CoCo investors

because this will determine whether the coupon distribution will be paid or cancelled.

To help investors mitigate this risk,

we also provide an alert function called “Buffer to Coupon Restriction” alert.

For example, in ABN AMRO bank’s page,

we can see the buffer to coupon restriction is € 5.1 billion based on Q3 2015 result,

our subscribers can set € 2 billion buffer alert here.

Once the buffer drops close to € 2 billion,

we will notify our subscribers via mobile push through.

After the regulation information, we provide the future targets.

The global finance crisis changed the way banks communicate with the market.

They are more transparent.

Here you have the 2018 target for Credit Suisse Group.

You can see the outlook of Credit Suisse Group.

They will cut cost,

increase capital,

wind down bad business

and grow profitable business.

If executed all these actions will help build a healthier Credit Suisse Group,

which in turn will make the CoCo unlikely to be bailed in.

In addition to the bond and issuer information, CoCo Monitor also provides “News & Analysis”.

We will provide our users the latest market news and deep analysis.

The news and analysis will cover every aspect including:

regulation, rating, legal, accounting, trading.

Our subscribers will have access to this valuable information anywhere, anytime via their mobile.

One app with all the information. We hope you find this app helpful.

If you want to know more about our products, you can download the app from app store and start a trial.

or you can contact us directly.

Thank you very much for your time.