PRESS ROOM
WisdomTree Launches World’s First CoCo Bond ETF
Thursday 17th May '18
First ETF globally to provide access and exposure to AT1 Contingent Convertible Bond Market, worth over $170 billion1 in Europe
AT1 CoCos provide investors attractive yields relative to other segments
of the bond market
London, 17 May 2018: WisdomTree, the exchange traded fund ("ETF") and exchange traded product ("ETP") sponsor, today announced the launch of the WisdomTree AT1 CoCo Bond UCITS ETF (“the fund”) 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 $170 billion 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 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, “We are thrilled to launch the world’s first ETF that offers access to the CoCo bond market. 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%2) 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 presents an exciting addition to investor’s income-generating tool-kits, as it 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%3. 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.
Product Information
Fund | Ticker | ISIN | Exchange | Trading currency | TER |
---|---|---|---|---|---|
WisdomTree AT1 CoCo Bond UCITS ETF - USD | CCBO | IE00BZ0XVF52 | LSE | USD | 0.50% |
WisdomTree AT1 CoCo Bond UCITS ETF – USD Acc | COCB | IE00BZ0XVG69 | LSE | USD | 0.50% |
AT1 CoCo Bonds: An AT1 CoCo bond has several features which are bond-like and equity-like. Similar to bonds, AT1 CoCos pay a coupon, whilst similar to equity dividends, the coupon of an AT1 CoCo is made on a discretionary basis.
Trigger and Loss Absorption Mechanism: When a trigger level is breached, this causes a loss absorption mechanism to be activated. There are two types of triggers; mechanical (relating to a specific capital threshold) or discretionary (due to regulatory decision) and two types of loss absorption mechanisms; Conversion to Equity or a Principal write down. If an AT1 is converted, it would trade like equities on the downside.
Floating rate back-end rates: Although AT1s are perpetual, they are callable after five years. AT1s have a fixed-to-float coupon structure. After the first call date, AT1 coupons become floating and adjust higher if interest rates were to rise. The floating-rate back-end effectively limits the asset class’s sensitivity to interest rates.
iBoxx Index rules: Investing in AT1 bonds only in European developed markets, denominated in USD, EUR and GBP. Liquidity screening in place and max issuer weight is capped at 7.5%
1 iBoxx & Bloomberg, with data as of 28 Feb. 2018.
2 Markit & WisdomTree. Figure represents the Yield-to-worst for the index as of 27 Apr. 2018
3 Bloomberg, with period from 31 Dec. 2013 to 31 Jan. 2018. The ICE BAML Euro Banking Index is used for the return of European bank corporate bonds. The STOXX Europe 600 Banks Index is used for the return of European bank equities. Returns are in U.S. dollar terms.
The iBoxx Contingent Convertible Liquid Developed Europe AT1 Index (the “Index”) referenced herein is the property of the Markit Indices Limited (“Index Sponsor”) and has been licensed for use in connection with WisdomTree AT1 CoCo Bond UCITS ETF. Each party acknowledges and agrees that WisdomTree AT1 CoCo Bond UCITS ETF is not sponsored, endorsed or promoted by the Index Sponsor. The Index Sponsor make no representation whatsoever, whether express or implied, and hereby expressly disclaim all warranties (including, without limitation, those of merchantability or fitness for a particular purpose or use), with respect to the Index or any data included therein or relating thereto, and in particular disclaim any warranty either as to the quality, accuracy and/or completeness of the Index or any data included therein, the results obtained from the use of the Index and/or the composition of the Index at any particular time on any particular date or otherwise and/or the creditworthiness of any entity, or the likelihood of the occurrence of a credit event or similar event (however defined) with respect to an obligation, in the Index at any particular time on any particular date or otherwise. The Index Sponsor shall not be liable (whether in negligence or otherwise) to the parties or any other person for any error in the Index, and the Index Sponsor is under no obligation to advise the parties or any person of any error therein.
The Index Sponsor makes no representation whatsoever, whether express or implied, as to the advisability of purchasing or selling WisdomTree AT1 CoCo Bond UCITS ETF, the ability of the Index to track relevant markets’ performances, or otherwise relating to the Index or any transaction or product with respect thereto, or of assuming any risks in connection therewith. The Index Sponsor has no obligation to take the needs of any party into consideration in determining, composing or calculating the Index. No party purchasing or selling WisdomTree AT1 CoCo Bond UCITS ETF, nor the Index Sponsor, shall have any liability to any party for any act or failure to act by the Index Sponsor in connection with the determination, adjustment, calculation or maintenance of the Index. The Index Sponsor and its affiliates may deal in any obligations that compose the Index, and may, where permitted, accept deposits from, make loans or otherwise extend credit to, and generally engage in any kind of commercial or investment banking or other business with the issuers of such obligations or their affiliates, and may act with respect to such business as if the Index did not exist, regardless of whether such action might adversely affect the Index or WisdomTree AT1 CoCo Bond UCITS ETF.
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