The chart below illustrates that Deutsche Bank 6% CoCo bond yields have spiked to 13.4%, indicating a large sell-off of CoCo bonds. The price of the Deutsche Bank CoCo bond has fallen to 73 cents on the Euro, causing investors to sell their bonds due to fears that they will not receive their coupon payments. This is a further indication of a loss of confidence in Deutsche Bank.
So what are CoCos?
CoCos are hybrid capital instruments that are structured to absorb losses in times of stress. They are bonds that automatically convert into shares in the bank, when a bank’s capital falls below a certain threshold.
Ordinarily investors are paid a coupon, just like any bondholder. However, when a bank is in difficulty they “bail in” the CoCo investor, converting their debt into shares in what would then be a lender in significant trouble.
CoCos are regarded as the highest risk type of debt that a bank can issue, and so they typically pay much higher coupons, in Deutsche Bank’s case 6%, than do other types of bank debt. They also allow an issuer to miss coupon payments in times of stress induced events.