Andrew Allentuck was kind enough to quote me in his latest piece for Investment Executive, Are “CoCos” a good fit for your clients?:
“They can call these bonds Tier 1 capital, which is equivalent to common equity,” says James Hymas, president of Hymas Investment Management Inc. in Toronto, “but [the bonds] get a better or more efficient treatment of the cost on income statements. A lot of portfolio managers will buy them because they have a mandate to invest in bonds, and these hybrids meet the definition of a bond and have terrific interest. Clients may be naive enough to accept these hybrids for their portfolios. But what clients forget is that in exchange for a yield pickup of a few hundred basis points over other corporate debt, a loss could approach 100%.”
In the search for yield, hybrids are the latest twist in the old idea of compromising the promise of a traditional bond to pay interest and principal on time, Hymas adds: “Many of these structures will go into bond indices. Index funds would have to buy them and some fund managers would then have to take them on, too.
“I would not be averse to buying them,” he continues. “But I would do it for a bond portfolio, which the client fully understands and accepts.”