Barry Critchley of the Financial Post has written a piece titled Banks prepare for CoCos that contains the interesting assertion:
“We would expect that the banks would make use of the contingent market for the incremental 3.5% of their capital because holding the balance in common equity could potentially adversely affect profitability,” said Altaf Nanji, an analyst with RBC Capital Markets.
But lots of things have to be clarified before that issuance starts.
…
– The securities have to be rated. And that’s not a slam dunk given that the securities are convertible if certain trigger points are reached. So far, Fitch is the only ratings agency that has rated any of the securities, though Standard & Poor’s has issued a request for comment on them.– The determination has to be made whether the securities should be in a bond index. Certainly OSFI wants them in the index and has make its plan very clear.
Shades of Hades, or at least the UK! Assiduous Readers will remember the tergiversations that were the topic of the post Merrill Keeps Lloyds ECNs out of UK Bond Indices that started when UK authorities made a similar attempt to debase the bond indices.
There’s only one teensy little problem with putting CoCos into bond indices: they’re not freaking bonds! If you don’t have the ability to bankrupt your debtor for being a day late or a dollar short, you’re not a bond-holder.
Canadian retail investors should be concerned, since bond ETFs are the most reasonable way for a bond investor to get exposure to bonds and there is already a high degree of aldulteration in bond ETFs, as I pointed out in my article Bond ETFs. On the positive side, there is the chance that a sharp divergence of opinion on the matter may lead to a wider variety of bond indices being marketted. REAL bond indices, I mean, not garbage like the DEX HYBrid index, discussed on September 30, 2010.
Update, 2011-2-7: A Reader has advised me (in rather polemical language!) that he considers my views on the DEX HYBrid Index to be significantly influenced by a conflict of interest, to wit: in late 2006, following the purchase by the TSX of the bond indices from Scotia Capital, it occurred to me that there was the potential for doing some kind of business with the Exchange based on my HIMIPref™ software, analytics, and indices (at that time, TXPR did not exist). I contacted them, they expressed curiosity and I made a presentation to them.
Sadly, nothing came of this attempt and my correspondent alleges that I have been left with a conflict of interest that renders it impossible for me to present my views on the DEX HYBrid Index as being independent.
I don’t see it. If I harboured such a violent grudge over every unsuccessful sales pitch I’ve made over the years, I wouldn’t have time for much else! However, given the nature of the allegations and the language used, I deem it proper to err on the side of disclosure. So make your own minds up regarding my motivation for disrespecting the DEX HYBrid Bond Index!
My correspondent has been invited to post a comment on the blog stating his views, or to provide me with a rebuttal that will be given equal time; to date, this invitation has been declined.
[…] I would like to see less government influence on internal operations: I am very concerned about OSFI’s attempts to debase the bond indices and would have greater faith in bond indices prepared by a trans-national […]