Everybody knows the rules. Shareholders are swashbucklers who take the risk of being wiped out in the hope that their stock will shoot for the moon. Cautious bondholders, by contrast, receive fixed payments – and their money back. But less risk means smaller rewards. So where to place bondholders who are taking an all-or-nothing bet?
Barclays has just issued the first bonds that can be written off while a bank remains a going concern. Others banks are expected to follow suit. Some bondholders have accepted the risk that they lose everything before shareholders. The grey area between debt and equity has long produced strange hybrids.
Lloyds Banking Group, Credit Suisse and UBS have issued cocos, or contingent convertibles, albeit with different structures. That makes them hard to compare. But all have something in common: blowout investor demand. Algebris, a hedge fund, has reported a 45 per cent gain for its specialist coco fund this year. Some cocos convert to equity at an agreed trigger. Bondholders replacing or diluting equity is accepted practice. But subverting the capital structure, as Barclays is doing by offering nothing, is something else.