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Bank capital: Cocos could be tough nuts to crack

Swiss finish boosts speculation; Credit Suisse, Barclays in frame

At a recent credit conference in London panellists in a session on bank capital asked the audience whether contingent convertible bonds (cocos) should be included in credit market indices. The session was held in a large room, which was packed with attendees, but not a single hand went up. It seems that proponents of these instruments still have a long way to go in convincing the market of their viability.

Ever since Lloyds and Rabobank issued the only two contingent convertible deals to take place so far (in late 2009 and earlier this year) activity in the market has been confined to a great deal of talk and not much else. But with the Swiss Federal Council’s announcement in early October of its acceptance of Cocos as part of a bank’s capital requirement, interest in the instruments has reached a new level. Credit ­Suisse will surely issue one.

Market sources suggest that Barclays is also sounding out potential investor interest in a new structure for contingent convertibles. This would trigger, given a severe deterioration in tangible capital, a certain portion of the principal on a bond being written down and this forgiven principal becoming effective equity in the bank.