Restrictions on the retail distribution of contingent convertible (CoCo) bonds are unlikely to cause further price jitters, Dawn Kendall has said.
Speaking about changes in the price of the bonds following an FCA announcement that it would limit who they could distribute to, Ms Kendall, a senior bond strategist for Investec Wealth & Investment, said news of the restrictions had now been “digested” and would be unlikely to cause further price volatility.
She said: “We have to think about the risk versus the reward, and that will be reflected in the price. But the FCA news has been taken on and it has been digested.”
CoCo bonds are hybrid capital securities that absorb losses when the capital of the issuer falls below a certain level.
| Debt being issued | CoCo bonds | Non-CoCo subordinated debt | Senior unsecured debt |
| Amount issued from 2009 to September 2013 (Source: www.bis.org/publ/qtrpdf/r_qt1309f.pdf) | $70bn | $550bn | $4.1 trillion |
In a 19-page paper issued on 5 August, Temporary Product Intervention Rules: Restrictions in Relation to the Retail Distribution of Contingent Convertible Instruments, the FCA announced new restrictions, limiting “the ability of firms to distribute CoCos to retail customers: the firm will have to check the customer falls within one of the permitted categories.”
In a section on the FCA’s rationale for intervention, the paper said: “These securities are inappropriate for distribution to ordinary retail investors.
“Despite significant market appetite for these instruments, there is growing concern that even professional investors may struggle to evaluate and price CoCos properly.”
The restrictions will come into force on 1 October and last for 12 months.
Jim Wood-Smith said: “I was intrigued by the FCA’s decision to curb the distribution of contingent convertible securities.
“CoCos are top-shelf material and the regulator’s decision is the right one But what interests me is what it means for the D2C market. Our industry is in a rush to flog investments direct to the customer.The regulator has given a clear message that this is not a free-for-all, ‘pile them high and sell them cheap’ jamboree.”
Ben Bennett, credit strategist for Legal & General Investment Management, said: “We have never been fans of CoCos — they are not bonds and should not be a core holding of a bond portfolio.”
Adviser view
Patrick Connolly, certified financial planner for national IFA company Chase De Vere, said: “There will always be a balancing act when trying to protect retail investors, but here the FCA has done absolutely the right thing.”
