* UK bank to include euro, dollar, sterling and Swiss franc
* Investment and junk rated bonds to be tracked
By Aimee Donnellan
LONDON, June 11 (IFR) - A new global index from Barclays to
gauge the performance of contingent convertible (CoCo) bonds
should widen their appeal and inject more transparency into the
riskiest form of bank debt.
The index, which follows a similar product launched by Bank
of America Merrill Lynch in January, will contain 65 CoCos that
could either convert to equity or be written down to nothing if
a bank hits a predefined trigger.
"CoCo issuance has steadily grown in recent years and we
anticipate further expansion of this market, as financial
institutions issue these bonds to help achieve required
regulatory capital ratios," said Brian Upbin, head of benchmark
index research at Barclays.
"Though CoCos are not eligible for broad-based bond indices
such as the global aggregate, there are debt investors who hold
these securities as out-of-index investments and need a
benchmark of asset class risk and returns," he said.
Since Lloyds issued the first CoCo at the end of 2009,
market participants have argued that an index is needed for the
sector to expand.
According to Citigroup estimates, European banks will be
incentivised to issue around EUR248bn of Additional Tier 1 debt
and EUR266bn of Tier 2 to meet capital requirements imposed by
CRD4. For 2014, the bank estimates, AT1 and Tier 2 issuance
could reach EUR20bn and EUR45bn respectively.
The bulk of the bonds in the new index, 88%, were originated
by European banks, with the remainder from Latin American and US
As is the case with many Barclays indices, bonds included
will have to have a minimum size of USD300m, EUR300m, CHF300m,
AUD300m, CAD300m, GBP200m or JPY35bn. A host of other currencies
will also be eligible for the index, which has a market value of
USD98bn as of May 31 2014.
Barclays plans to exclude securities with conversion
features based solely on the discretion of local regulators,
those that have an additional equity conversion option based on
regulatory or solvency criteria, inflation-linked bonds and
floating-rate issues, private placements and retail bonds, and
illiquid securities with no available internal or third-party
US dollar-denominated bonds currently account for over half
the index at 58.7%. Euro deals follow with 29.2%, sterling
stands at 9.6% and Swiss francs make up 2.5%.
While the ratings of the bonds included range from Aaa to
Caa, the highest proportion are rated BB, or just a notch just
below investment grade.
Barclays is evaluating the quality of the bonds using the
middle rating of Moody's, S&P and Fitch; when a rating from only
two agencies is available, the lower will be used.
Contingent capital bonds that are converted to equity or
have been written down (either fully or partially) will exit the
index at month-end rebalancing.
The Barclays index will track hybrid capital securities that
do not qualify for other high-yield, capital securities or
(Reporting by Aimee Donnellan; Editing by Shankar Ramakrishnan
and Marc Carnegie)