LONDON Oct 18 The following are responses from
a survey of fixed-income investors who were asked for their
views on contingent capital and whether or not they would buy
Contingent capital, or CoCos, are bonds that convert to
equity to provide banks with more capital when they need it.
Financial regulators favour them as a way to shore up large
banks that could destabilise the financial system if they were
to run into trouble.
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AVIVA (Fixed-income assets under management 140 bln as of
Oliver Judd, credit analyst:
At this stage it isn't possible to definitively say 'yes' or
'no' to investing in CoCos across the broad spectrum of fixed
income mandates we run. Investors don't yet know precisely what
we're investing in.
ALLIANCEBERNSTEIN - (Assets under management in fixed income
just over $450 bln as at end-June 2010.)
Steve Hussey, credit analyst:
The product makes sense, especially potential two-tier
triggers (two types of investors: hedge funds etc at higher
trigger, more traditional senior fixed income investors and
retail (high net worth) at lower trigger). Would expect this to
grow to surpass current T1 hybrid market.
AXA Investment Managers - (Assets under management in fixed
income 300 bln euros)
Anne Velot, senior credit fund manager, head of continental
After the experience of how hybrid Tier 1s behaved in the
credit crisis -- lots of illiquidity and volatility,
difficulties in pricing the embedded options and high scrutiny
from risk managers and clients -- I'm not sure my investors are
ready to pile up on that sort of risk again yet.
EUROPEAN CREDIT MANAGEMENT (Specialist fixed-income manager.
Assets under management at May 2009 12.1 bln euros)
ECM's portfolio managers:
We will be interested in the CoCos, on a deal by deal basis.
However our interest could be limited if the securities are
not rated and/or included in various bond indices, as these are
important factors for market appetite as well as for liquidity.
INSIGHT INVESTMENT (Fixed income assets managed by fixed
income managers 29 bln pounds)
David Averre, head of credit analysis:
At Insight, we believe it is in the interests of our clients
and of the banking sector for a hybrid capital market to
continue to exist.
However, we expect that our participation in this market
going forward will be less than our historical position.
The prospect of a permanent write-off based on a potentially
arbitrary regulatory decision and/or conversion into some form
of equity will not be palatable to many of our clients.
LIONTRUST ASSET MANAGEMENT (Assets under management in fixed
income 39 mln pounds as of Sept. 28)
Simon Thorp, head of fixed income:
We can buy them. We own Lloyds' CoCos.
If there's new paper - such as the Swiss banks, and maybe
others, then we look at each one on merit. In the case of
Lloyds, we decided investors were being overcompensated for the
LV ASSET MANAGMENT (Total assets under management 8 bln
John Hampton, lead manager of LV's corporate bond fund:
Equity income investors are one potential group that could
be interested. We have a fund manager who holds Lloyds' CoCos
for this reason.
A bond with a write-down feature might be easier for
fixed-income investors to hold.
At LV, we currently have the capability to invest in them,
so yes, with limits, we can buy them.
PIMCO - fixed income specialist fund manager. (Pimco Europe
had 113 bln euros of assets under management as of March 31,
Ed Devlin, fund manager:
We would buy it, but depends very much on the institution
and the structure. There is not a homogeneous market, and the
devil is in the detail on these instruments.
Ratings are beneficial not because we rely on them but (they
are) often in guidelines our clients give us -- we have to have
ROYAL LONDON ASSET MANAGEMENT (Manages 19.15 bln pounds of
fixed-income assets, of this 9.55 bln is in corporate bonds)
Eric Holt - Head of Credit:
Holt said his team would buy CoCos as they believe that the
risks are adequately reflected in the price, with the regulatory
background developments being supportive.
SCHRODERS (Assets under management in fixed income 29 bln
pounds as of June 30, 2010)
Roger Doig, credit analyst:
We would be vocal about keeping these instruments out of
bond indices, because instruments that render bondholders pari
passu or subordinate to equityholders on point of conversion are
not bonds under any definition -- they are a form of convertible
or catastrophe insurance.
We agree with rating agencies that they are not rateable.
STANDARD LIFE INVESTMENTS - (Assets under management 64.8
bln pounds in fixed income as of June 30, 2010)
Andrew Fraser - investment director:
We invested in the Lloyds' CoCos and in the Rabobank senior
contingent bonds and would consider investing in new contingent
bonds, subject to them meeting our investment criteria.
We are less concerned about the principal write-down and
conversion features if the trigger points are clear and are
based on variables that a credit analyst can model.
But in cases where the conversion or write-down triggers are
based on regulatory discretion, these CoCos would be of no
interest to us.
(Additional reporting by Thomas Reggiori Wilkes; Editing by