In the world of post-crisis bank hybrids, contingent capital has in many respects been a disappointment for structurers. Once heralded as a convenient solution to demanding new capital requirements, in much of Europe, Cocos have since been pushed aside in favour of the regulators favourite: common equity. Many bank supervisors worry about permitting what they see as an untested structure to take up large swathes of banks loss-absorbing capital.
But Switzerland has bucked the trend. Under its too-big-to-fail rules, Credit Suisse and UBS must hold large quantities of Cocos equal to 9% of their risk-weighted assets.
That in itself is market leading: the way these securities act in times of stress is being watched by global regulators, who will consider permitting the instruments more widely if they pass such tests.
So it was that Credit Suisses issue of high strike contingent capital in early 2011 was a bold display of support for an asset class that had already been the subject of so much debate. The deal blazed a trail.
Some 500 accounts placed $22bn of orders for the RegS registered offering of what the bank dubs buffer capital notes. And institutional demand was strong. Real money investors bought nearly half of the deal private banks bought a third, with hedge funds and equity investors allocated the remainder.
While Credit Suisse has embraced contingent capital, UBS has taken a conservative stance towards Cocos, worried about a downward spiral at the time of conversion.
It sold its own contingent deal in early 2012 a $2bn low trigger coco. The structure means the bank has to be in much more trouble for that deal to trigger than for the Credit Suisse deal but the consequences are more severe for bondholders. UBSs note will be written off, permanently and in full, if the banks common equity tier one ratio falls below 5% of risk weighted assets.
In contrast, Credit Suisses deal will convert into equity if the banks common equity ratio falls below 7%.
The buffer capital notes were a direct response to a regulatory requirement, yet the execution of the deal was impressive. The day before launching the trade, Credit Suisse sold a private placement tranche to Qatar Holding and Olayan Group.
That set a pricing benchmark for the then untested structure, and allowed the bank to cap the size it was seeking in the public markets.
As the first deal of its kind under Switzerlands too-big-to-fail rules, the deal also cleared the air for Credit Suisse in the face of market uncertainty over Coco trades."We felt that there was some market concern around the issuance of the notes and that there was some validity in getting the deal done. To do it so early in the process is useful," CFO David Mathers said at the time.