(Corrects name of instrument to contingent convertible in par
By Annika Breidthardt and Matthias Sobolewski
BERLIN, April 10 Germany has given its banks
long-awaited legal certainty on the tax treatment of "CoCo"
bonds that can be converted into shares to bolster their
capital, the finance ministry said on Thursday.
In a decision that clears the way for German lenders to
issue the securities, the ministry said banks will be allowed to
deduct interest payments on contingent convertible bonds from
Also known as Additional Tier 1 (AT1) bonds, the securities
are designed to act as reserve capital when a bank runs into
trouble. They can be converted into shares, temporarily written
down, have their coupon payments suspended, or get wiped out
entirely if a bank's capital falls below a set level.
"The finance ministry, together with the federal states,
today created legal certainty on the treatment of instruments of
banks' additional core capital, so-called CoCo-bonds," the
ministry said in an email to Reuters.
"On the basis of existing tax law, banks in Germany can use
these instruments with comparable conditions to their European
CoCos have proven popular with banks and investors, who
receive a high rate of interest to compensate for the risks
involved in holding them.
German banking association BDB has described the
long-awaited approval as an urgent matter for banks seeking to
bolster their balance sheets, saying the delay threatened to put
the country's financial sector at a competitive disadvantage.
Banks in Britain, France, Switzerland, Denmark and Belgium
have all issued AT1, after those countries laid the regulatory
groundwork ahead of Germany. Bank BBVA was the first
Spanish lender to issue AT1 capital last year after Madrid
cleared the way.
In Germany, Deutsche Bank alone plans to issue at
least 5 billion euros ($7 billion) of AT1 capital before the end
of next year, paving the way for other banks.
German property lender Aareal Bank has said it
will seek to repay the 300 million euros in state aid it
received in the financial crisis by issuing AT1 instruments
later in the year.
"CoCos are a type of reinsurance for banks and regulators in
case of a catastrophe, such as if a trading loss in the billions
causes the capital ratio to plunge overnight," said Marcus
Schulte, regional head of bank debt issuance at Credit Suisse.
"That's not going to actually happen very often. Normally, a
bank would already address its capital ratios starting at 7
percent and possibly raise new capital or introduce other
Investor demand for AT1 issues has been high, allowing banks
to raise cheap capital to fortify their balance sheets and
improve their leverage ratios. Banks have been especially keen
to raise new capital ahead of a balance sheet check underway by
the European Central Bank, which will supervise Europe's big
lenders from the end of this year.
"It's going to get interesting when these conditions change.
That will sort the wheat from the chaff." Schulte said.
"Then for banks with weaker capital or credit profiles, it's
going to possibly get tougher, or at least more expensive, to
Under the bank safety framework known as Basel III, banks
can raise 1.5 percentage points of their 6 percent Tier 1
capital ratio using AT1.
"CoCos are not a magic wand to solve all capital problems,
rather, one instrument among many. We expect European banks to
issue CoCos to optimise their capital structure," said Marc
Hellingrath, head of financials and fixed income fund manager at
Bankers and investors expect German banks to use the same
structure as French, Danish and other banks, where if bank
regulatory capital falls below a certain threshold, bondholders
lose their investment. But investors still have the potential to
recover those losses should the bank return to health.
According to recent research by JPMorgan, Deutsche Bank's
AT1 requirement is almost 13 billion euros while Commerzbank may
need to raise almost 2.5 billion euros in AT1 capital.
(Additional reporting by Thomas Atkins in Frankfurt; Writing by
Annika Breidthardt; Editing by Catherine Evans)