WisdomTree has launched WisdomTree AT1 CoCo Bond UCITS ETF on the London Stock Exchange.
This is the first ETF globally to provide investors with access to the Additional Tier 1 (AT1) Contingent Convertible (CoCo) bond market, which is worth over $170bn in Europe. The fund offers professional investors the opportunity to earn potentially higher yields than investing in senior bank debt, and the opportunity to achieve portfolio diversification and possibly mitigate their fixed income portfolio’s exposure to rising interest rates.
CoCos are a form of hybrid debt that are intended to convert into equity or have their principal written down to absorb the issuer’s capital losses upon the occurrence of certain triggers, such as the issuer falling below a specified liquidity ratio. The fund seeks to track the Markit iBoxx contingent convertible liquid developed Europe AT1 index which invests in CoCo bonds issued by financial institutions from developed European countries.
Rafi Aviav, WisdomTree head of Product Development in Europe, said, “This is a major development for investors globally who can now, for the first time, gain diversified exposure in a Ucits structure to the AT1 CoCo market with the ease and efficiency of trading an ETF.”
“We believe this new solution answers pressing investor demand, and the new fund will be well received by the professional investment community. The developed Europe AT1 CoCo market offers attractive yields (currently at 5.1%) and could also potentially serve as a diversifier for bond portfolios in a rising rate environment. We see the current market environment as supportive for AT1 CoCo valuation, particularly considering AT1 CoCo yields today relative to other segments of the bond market, reinforced capital positions for European banks, the potential for rising interest rates and for Basel IV to further strengthen banks’ balance sheets,” he added.
Christopher Gannatti, WisdomTree Head of Research in Europe said, “Fixed income investors seeking higher-income products may wish to consider an allocation to AT1 CoCos. We believe this ETF allows for access to this asset class in a diversified way. Investors can also choose the size of their investment ranging from smaller trades to institutional-sized allocations.
“In the current rising interest rate environment, European financials should benefit, with banks potentially seeing greater earnings. When thinking of AT1 CoCos, the primary consideration is on the fundamental strength of the banks that are issuing these securities—anything that positively impacts these institutions has the potential to positively impact this asset class. Over the available history, investing in AT1 CoCos has outperformed European Bank Corporates by 4.3% and European Bank Equities by 6.4%. As we continue to see signals of strength within this sector—such as the release of the Bank of England Stress Test Results in December of 2017—we may continue to see strong performance for this asset class,” he said.
CoCos may have unique equity conversion, principal write-down or coupon cancellation features which are tailored to the issuing banking institution and its regulatory requirements. In the case such triggers or features are invoked, investors may lose some or all of their original investment. It might further be difficult to anticipate the trigger events that would require the debt to convert into equity or the write down to zero of principal investment and/or accrued interest. As CoCos are relatively new complex investments, their behaviour, including their liquidity, under a stressed financial environment is thus unknown. Investors in CoCos may experience a reduced income rate and principal loss is possible.
Sometimes referred to as the ‘biggest manager you have never heard of’, Jonathan Boyd has caught up with PGIM for insight into its Europe region developments as part of global expansion