CoCos: Too easy to ignore the risks?

CoCos: Too easy to ignore the risks?

CoCos are one of the most popular trades in the credit market, but managers must ensure they identify all the substantial and unusual risks they pose before investing, says Filippo Alloatti, senior credit analyst at Hermes Investment Management

There was concern last year around the abundant issuance, regulatory backing, and investor demand that had made contingent convertible bonds – known as ‘CoCos’ – one of the most popular and talked about credit trades.  We ourselves recognised the investment opportunities provided by the instruments, but are wary of their inherent risks. The market has evolved since then, but it is far from mature.   Assessing risk  Fundamental analysis of the quality of banks’ assets, and determining which lenders are likely to burn through their capital buffers, continues to be key in assessing th...