e-fundresearch.com: Since only a minority of investors is following the CoCo market on a regular basis: What have been the most essential developments and trends in this particular asset class in 2014?
Daniel Björk: In the course of 2014 the CoCo market more than doubled in size to approximately EUR 80 bn. Most of the market growth occurred during the first half of 2014, where the macroeconomic backdrop was more favourable for these higher beta bonds. This development supported the diversification of the CoCo market significantly. Since the beginning of 2015, the market grew by another EUR 10 bn. We assume that the market can grow to around EUR 300 bn over the next couple of years, as most banks must continue to issue CoCos to comply with the regulatory framework (Basel III, FSB proposal, Leverage Ratio). In addition, we believe that we are still in a "sweet spot" for the Coco market as it is still somewhat protected from a regulatory perspective with e.g. the coupon cancellation rules not fully applicable until 2019. We expect several banks to come to the Coco market for the first time including BNP, RBS, Swedbank, DnB NOR, ING, ABN Amro.
e-fundresearch.com: To what extent did the results of the ECB bank stress test of October 2014 influence the CoCo market?
Daniel Björk: At the end the results of the stress-test by European Central Bank (ECB) there weren't negative surprises. The shown losses, which occur in the situation of the worst scenarios, are in line with the general market expectations. Positive is the fact that none system relevant bank within the Euro-zone is a "fallen" candidate.
Just for this relatively young asset class of CoCo – bonds the asset quality review of ECB was extremely important. The transparency which is shown through the results, leads to the fact that all market participants have a better view of the direct risk investors buy with holdings of different banks. Furthermore the results show, that the risk reduction, which is part of the Basel-III rules, is already in the phase of implementation. These development strengthens in general the investment thesis of CoCo-bonds and the direct investment strategy into these bonds.
