Cyprus Bail-Out Highlights Risk of Bail-In

Here is a link to an interesting FT article regarding recent developments on the subject of bail-in.

As the dust settles on the bail-out of Cypriot banks, attention is returning to the way in which bail-in will operate in the future.  Investors are rightly looking at factoring bail-in risk into the price of bank debt, particularly senior unsecured debt which before the Cyprus crisis had not really been subject to bail-in.  In addition, banks are looking at new types of debt instrument, such as contingent convertible (Coco) bonds and “priority bail-in bonds”, designed primarily it seems to provide additional protection to holders of senior unsecured debt.

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New Developments in the Market for CoCo Bonds

Here is a link to an FT article discussing the recent issuance by Barclays of CoCo bonds, the positioning of CoCo bonds within the capital structure and some of the risks associated with this type of instrument.

Traditionally, CoCo bonds have converted to equity once a particular threshold is breached.  In contrast, the bonds recently issued by Barclays are written down to zero if the bank’s common equity tier-one ratio falls below 7%.  In return, investors receive a coupon of 7.625%, which at least one analyst has described as a “depressingly low” yield for effectively providing protection to the equity investors in a bank.