BNP Paribas, UniCredit CoCo coupons most at risk

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BNP Paribas SA and UniCredit SpA are closest to running into regulatory restraints on making payouts on securities, including their riskiest bonds, among the European banks followed by analysts at CreditSights Inc.
If BNP were to run up losses that consumed capital amounting to 1.05 percent of assets weighted by risk, that would crimp the Paris-based lender’s ability to pay coupons on its additional Tier 1 notes, as well as dividends and staff bonuses, analysts led by Simon Adamson wrote in a report.
At UniCredit, capital falling by a “paltry” 0.59 percent of assets would force the Milan-based lender to calculate its so-called maximum distributable amount and retain cash within the company, the analysts found.
Concern that lenders might be unable to pay coupons on their contingent convertible bonds was behind volatility that sent the average price of the securities in Bank of America Merrill Lynch’s CoCo index to as low as 88.79 cents on the euro on February 12, from 100.34 cents at the end of 2015.
The concerns, which center on the fact that a lost coupon on a CoCo bond is gone forever while dividends and bonuses can be recouped later, are forcing a rethink of the rules governing a market that regulators themselves invented.
“These banks have thinner cushions than most of their peers,” Adamson said by telephone. “They do have some improvement in capital ratios built into their business plans, but as we’ve seen, one-off losses can easily erode that.”
Third Sale
Investors currently aren’t concerned by the possibility of BNP triggering restrictions on its ability to pay coupons. On March 23 the lender raised $1.5 billion in its third sale of CoCos, setting the coupon at 7.625 percent. The notes are bid at 100.6 cents on the dollar to yield 7.54 percent to its call date in 2021, data compiled by Bloomberg show.
“The deal went pretty well, so for the moment it’s clear there isn’t too much concern,” Adamson said.
Officials at the banks didn’t respond to e-mails seeking comment.
While BNP and UniCredit are closest to having to act to preserve capital, Deutsche Bank AG is nearest to hitting a different barrier that would also prevent payouts being made, Adamson said.

Bond Performance
“ADI is an issue that mainly affects Deutsche Bank,” said Adamson. “For the rest, it’s the MDA that’s the problem and it’s that that investors are looking at. You can see it in the way the bonds are performing.”
While the market has steadied since the declines in the first two months, it has settled at a lower level than before. Fewer than 30 percent of CoCo bonds are now quoted at par value or higher, Merrill index data show. On average, investors demand a yield premium of 5.39 percentage points relative to government debt to hold the securities.

up from 4.48 percentage points at the end of 2015 and a record 3.52 percentage points in June 2014, the data show.


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