Investors should buy new hybrid debt to protect other assets, says Bank
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Investors should add the newly created hybrid debt bonds, or CoCos, into their portfolio for the good of the whole market, according to the Bank of England.
Speaking at the Belgian Financial Forum Conference in Brussels today, Bank of England deputy governor financial stability Paul Tucker argued that investors should consider adding the new debt/equity bonds created by the likes of Lloyds Banking Group to their portfolios to shore up financial institutions and thus protect their other assets.
The new hybrid debts - Enhanced Capital Notes or Contingent Convertibles (CoCos) - are bonds that become shares if the financial institution’s capital ratios breach a certain point. Last week Lloyds was forced to increase its sale of these new debts from £7.5bn to £9bn due to demand.
Tucker said: “Why should long-term savings institutions and asset managers be prepared to provide such insurance? If enough of them were to do so for enough banks, it might well help to protect the value of their investment portfolios more generally.
“By taking a hit in one part of their portfolio by providing equity protection to banks, institutions might well be able to support the value of their investments more widely.”
The Association of British Insurers was one of the most vocal critics of the new debt, arguing that any investors in the debts would have to sell them if they became equity. Last week it said: “Our members are strongly opposed, at this present time, to these instruments being included in bond indices.”
Tucker admits a take up of CoCos would entail a structural shift over time in investment portfolios, but argues that the system might be able to manage that adjustment as it managed the adjustment to the development of the existing hybrid capital markets.
He says: “Demand for CoCos is, inevitably, uncertain at this stage, but if they could form a material part of recovery plans, the landscape might just be transformed.”
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