The Impact of a New Coco Issuance on the Price Performance of Outstanding Cocos
Posted: 14 Mar 2015
Date Written: March 12, 2015
In this paper, we investigate the price performance of outstanding CoCos after a new CoCo issue is announced by the same issuer. Contingent Convertible bonds or CoCo bonds are new hybrid capital instruments that have a loss absorbing capacity which is enforced either automatically via the breaching of a particular CET1 level or via a regulatory trigger.
When an issuer has already some CoCos outstanding and is announcing the issuance of a new CoCo bond, there are at least two opposite forces at work. On one hand, a new issue means that the capital of the issuing institute is strengthened (at the Additional Tier 1 or Tier 2 level). On the other hand, there are the market dynamics and investors often prefer to be rather invested in the new CoCo than in the older ones. We estimate the price impact on the outstanding CoCos via two methods. The first method basically compares the returns of the outstanding CoCo bonds after an announcement of a new issue with some overall CoCo indices. This method however does not take into account idiosyncratic movements and basically compares with the general market trend. A second model-based method, compares the actual market performance of the outstanding CoCo bonds, with a theoretical model performance taking into account idiosyncratic effects, like movements in the underlying stock, credit default spreads or volatilities.
In total, we investigate 24 cases of new CoCo bond issues. The main conclusion of the investigation is that there is a moderated negative effect on outstanding CoCo bonds. This is confirmed by both methodologies and the impact is on average an underperformance of about 25 bps to 50 bps in between the announcement date and the issue date.
Keywords: contingent convertibles, CoCo bonds, new issuance
JEL Classification: G12, G13, G18, G21, G28, G32
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