WHAT IS A 'COCO'?

A “coco” or “contingent convertible” bond is a type of security issued by banks and insurance companies. They were first issued after the financial crisis, and were designed expressly to help ensure that banks are sufficiently well capitalised to survive another severe shock to the global financial system.

THE EIGHT REASONS
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COCOS

These instruments are not inherently as complex as some investors may perceive.

Why?
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BANKS

They really have changed.

How?
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YIELD

Glorious yield!

How high?
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SUPPLY

Coco supply is not endless… so consider buying some before they run out!

Why?
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BUFFERS

Cocos offer a much higher margin of safety than some investors may realise.

Why?
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NOT BORN EQUAL

Choose your cocos carefully, and understand your risks.

How?
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DIVERSIFIER

Cocos offer attractive low correlation characteristics.

How?
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RATE RESETS

Cocos offer a degree of protection from longer term rate hikes.

How?
HOW TO SELECT BEST COCOS?

The investor should select the highest quality and best value issuers, which have the strongest balance sheets and capital generation characteristics. We can focus on cocos that have the lowest likelihood of missing coupon payments. Through detailed analysis of available distributable items and by making forecasts of retentions, the investor can seek to predict whether issuers will have sufficient reserves in the future to pay coupons. We can aim to invest in cocos whose likelihood of conversion is remote.

1.
CREDIT FUNDAMENTALS

Fundamental, in-depth analysis of the issuers’ balance sheets and income statements, combining the strengths of both the Merian Global Investors credit and equity desks.

2.
DISTRIBUTABLE RESERVES

Forecasting whether issuers have sufficient reserves to comfortably pay coupons now and in the future.

3.
BUFFER TO COUPON DEFERRAL

Forecasting issuers’ future capital ratios versus future capital requirements, and whether issuers will maintain a healthy capital buffer.

4.
BOND STRUCTURE

Selecting the most attractive bonds from the highest quality issuers.

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