London, United Kingdom (4E) – The United Kingdom’s independent regulator of retail and wholesale financial services firms is banning the sale of high-yielding but risky and complex contingent convertible bonds (CoCos) to individual investors in Europe for 12 months starting Oct. 1.
The Financial Conduct Authority (FCA) said Tuesday banks will only be allowed to sell CoCos to institutional, professional investors and high-net-worth individuals while it drafts permanent rules for the said bond.
CoCos are fixed-income securities that automatically convert into ordinary shares if a firm’s capital falls below a pre-determined level. The Lloyds Banking Group introduced the hybrid debt in 2009 to raise capital in response to the financial crisis the year before.
By 2013, U.K. banks have issued roughly $70 billion worth of the bond, according to a government report. German, French and Spanish banks followed suit. Last year, European banks sold $15.3 billion CoCos, according to financial software company Dealogic. The FCA predicted that total CoCos issuance is set to roughly double over the next five years or so.
Demand for CoCos continues to climb with investors attracted by its average 5.87 percent yield, compared to 2.59 percent for corporate debt globally, according to Bank of America Merrill Lynch indexes.
Last month, European regulators expressed concern banks may be selling them to consumers without properly explaining the risks. It warned investors of the risks from the bond.
Up to 75 percent of UK’s CoCos sales in some countries have been to retail investors, with the loss per customer in some cases over 80 percent of their initial investment, the FCA said.
In April, some bond managers have slashed exposure to CoCos in the face of falling yields due to increasing supply of the bond.
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