Design matters: an event study of CoCo bond offering announcements : how does design affect equity and credit markets perception of CoCo’s?

Abstract

This thesis performs an event study on contingent convertible (CoCo) bond offering announcements made in the period 2009-2016. Using a sample of 95 announcements from 39 European banks and a standard event study methodology, we find that CoCo announcements on average lead to increased equity prices and reduced CDS spreads indicating that both equity and credit markets have a favorable view of CoCo’s. Equity prices react more positively to CoCo design features implying high wealth transfer to shareholders at conversion. We also find some evidence suggesting that the positive reaction relates to a partial anticipation of equity. The increase in equity prices does not apply to a significant proportion of observation however, meaning that these findings can’t be generalized to all individual CoCo announcements. The reduction CDS spreads suggest that CoCo’s do reduce the perceived probability of default. Credit markets appear to have a preference for CoCo’s with low implied wealth transfer to shareholders at conversion but the main determinant in explaining the reduction in CDS spreads is issue size. The reduction in spreads also appears to be more prominent for later issues indicating that the perception of CoCo’s have changed, or that markets anticipates CoCo’s more for later issues. Through a logit regression and a Cox proportional model we find that large banks are more likely to issue CoCo’s and that the typical CoCo issuers have a higher degree of long term financing and higher Tier 1 ratios compared to their non-issuer counterparts.