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July 10, 2014 5:39 pm
Banco Popular’s decision to pull a planned €750m contingent convertible sale citing poor market conditions on Thursday has dealt a sobering blow to what had become a booming market for banks to strengthen their capital.
Contingent capital bonds – or “cocos” – count towards a bank’s capital because they are convertible into shares if its common equity tier one ratio falls below a set “trigger” level. They are designed to protect big banks from having to be bailed out by taxpayers.
Deutsche Bank estimates that European banks have raised almost €35bn of cocos since last October as they bolstered their balance sheets ahead of the European Central Bank’s asset quality review and stress tests this year.
Banco Popular said it had postponed the issue, although no new date had been set. A person familiar with the deal said the bank could have completed it, but not at the 7 per cent interest rate it was seeking.
The person said the Spanish bank balked at paying an 8 per cent coupon, which is what investors were seeking in response to the uncertainty created by the crisis at Portugal’s Banco Espírito Santo. Another person close to the deal said: “The market is becoming more discerning and going back to spreads that actually make more sense.”
Davide Serra, founding partner of Algebris Investments, a hedge fund, said: “There was a point in the last few months where the market for cocos was quite frothy and that is being corrected. It is healthy – the important thing is that the market is still open.”
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