The Securities Litigation Expert Blog

Jack Duval Quoted in MarketWatch Article on CoCo Bonds

Posted by Jack Duval

Jan 2, 2018 10:46:12 AM

Accelerant Managing Partner Jack Duval was quoted in a MarketWatch article on contingent convertible ("CoCo") bonds.

What the article didn't mention is that Deutsche Bank and other CoCo issuers have been exploring making a market in total return swaps on CoCo's, including those issued by themselves.  If implemented, these derivitives would set up highly complex and perverse incentives where the bank (as counterparty) could profit from weakening it's own financial strength.

Banco Popular Bail-In

In a pattern that is repeated frequently in securities markets, in early- to mid-2017 Banco Popular common equity declined 80 percent while the Banco Popular 8 1/4 perpetual CoCo's only declined 20 percent.  This relationship existed until a month before the CoCo's were wiped out in the reorganization, thus "bailing-in" the bank by being completely written off.

Banco Popular CoCo v. Common Equity Chart.gif

Source: Bloomberg

Suitability of Complex Products

As I have discussed here and here, contingent convertible bonds are highly complex and subject to extraordinary risks that are not typical of traditional bonds.  They are only suitable for highly sophisticated investors who can evaluate the company specific and regulatory risks and are willing to lose their entire investment.  This eliminates virtually all retail investors and most institutional investors.

For information about securities expert Jack Duval, click here.


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Topics: Contingent Convertible Bond, CoCo, Banco Popular, Bail-in, MarketWatch

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