As the search for yield drives investors of all quality into higher yielding investments, it’s probably a good thing to make sure such deeply subordinated bonds aren’t being sold in denominations that could attract true retail investors — if not for clear moral reasons, than at least to avoid what will surely be a class action law suit someday in the future. But most of the bonds are sold in €100,000 or larger denominations.
And when we talk about the best or most sophisticated investors, don’t we just mean those with money to lose? Are only the best investors levelling credit and maturity curves across institutional asset classes like January sales shoppers stampeding Selfridges for cheap iPads?
It is true that the EU is one of few, if not the only, market in which a retail buyer who wants accredited investor status must meet criteria that include a professional history in the financial sector of at least a year. But even the most sophisticated institutional investors are having trouble wrapping their heads even around aspects of instruments much simpler than CoCos.
Take European senior unsecured bank bonds. Investors complain that the rules around what is and isn’t bail-inable are too confusing to price the risks into their holdings. In fact, bankers claim investors charge significantly more for contractually bail-inable senior compared with senior that has been rendered bail-inable by a national statute.
They are of course practically equivalent from a risk perspective. If investors aren’t sophisticated enough to see that, then maybe we should give up on this idea of sophistication altogether. Or come up with a better test for it.