Hybrid Bonds as a strategy of sequential finance in the banking sector

26 Pages Posted: 1 Oct 2021

See all articles by José Fajardo

José Fajardo

Getulio Vargas Foundation

Layla Mendes

Getulio Vargas Foundation (FGV)

Rodrigo Leite

COPPEAD Graduate School of Business

Date Written: September 30, 2021

Abstract

Up to this point, the literature on the issuance of convertible bonds has neglected financial institutions. Contrary to firms, banks not only can issue convertible bonds but also, after the subprime crises, contingent convertible (CoCo) bonds emerged as an alternative. Hence, the purpose of this study is threefold: first, we expand the literature on the motivation to issue convertible bonds in the banking sector; second, we introduce a new proxy (Loans-Deposits Flow) to measure the reinvestment in this sector; and third, we analyze the differences in the motivation for issuing CoCo bonds when compared to convertible bonds. Our results show that the theory of sequential financing is not confirmed for CoCo bonds in the banking sector. Additionally, we provide evidence that banks issue CoCo bonds for regulatory purposes (to increase their capital), while convertibles are issued to allow banks to expand their investments and loan portfolios. The results are robust to several specifications including a propensity-score matching and a difference-in-difference analysis.

Keywords: Hybrid bonds, Convertible bonds, CoCo bonds, call provision, sequential finance.

JEL Classification: G01, G21, G23

Suggested Citation

Fajardo, José and Mendes, Layla and Leite, Rodrigo, Hybrid Bonds as a strategy of sequential finance in the banking sector (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3933950 or http://dx.doi.org/10.2139/ssrn.3933950

José Fajardo

Getulio Vargas Foundation ( email )

Brazil
55213799 5781 (Phone)

HOME PAGE: http://www.josefajardo.com

Layla Mendes

Getulio Vargas Foundation (FGV) ( email )

Praia de Botafogo, 190
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil
+55 21 99904-2229 (Phone)

Rodrigo Leite (Contact Author)

COPPEAD Graduate School of Business ( email )

Rua Pascoal Lemme
355 - Cidade Universitária
Rio de Janeiro, Rio de Janeiro 21941-918
Brazil

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