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Flash info Capital Markets | CoCo Bonds: publication of the European Banking Authority's recommendation on Buffer Convertible Capital Securities


Further to the Basel III Accord, the first measures of which shall be implemented on 1 January 2013, the European Banking Authority (the "EBA") has issued on 8 December 2011 a recommendation(1) (the "Recommendation") which notably includes a common termsheet for Buffer Convertible Capital Securities ("BCCS"). BCCS are EBA's version of Contingent Convertible Bonds (CoCo Bonds) and may be issued by banks before 30 June 2012 for inclusion within their temporary capital buffer of Core Tier 1.

The EBA recommends national banking regulators (in France, the Autorité de Contrôle Prudentiel) to ensure that credit institutions build a temporary capital buffer to reach a 9% Core Tier 1 ratio by 30 June 2012, after notably reflecting market prices of sovereign exposures as of 30 September 2011.

Only financial instruments of the highest quality (i.e. ordinary shares or similar instruments) should be eligible to Core Tier 1. However, BCCS will also be eligible to Core Tier 1 if (i) they are issued no later than 30 June 2012 and (ii) their terms are consistent with the EBA's common term sheet attached as Annex III to the Recommendation.

BCCS shall notably include the following terms:

  • Issue date: no later than 30 June 2012
  • Status: deeply subordinated
  • Maturity date: perpetual without a maturity date
  • Issuer call option: no earlier than 5 years, subject to the banking regulator's prior approval and provided that (i) the BCCS are replaced by regulatory capital of equal or better quality or (ii) the issuer demonstrates to the satisfaction of the banking regulator that its own funds would, following the call, exceed significantly a Core Tier 1 Ratio of 9%.
  • Coupon cancellation: optional coupon cancellation for the bank (at its sole discretion); mandatory coupon cancellation upon breach of applicable minimum solvency requirements or insufficient distributable items; any coupon not paid is no longer due.
  • Mandatory conversion into ordinary shares: in case of contingency event (Core Tier 1 / Common Equity Tier 1 Capital Ratio falls below a certain level) or viability event (a conversion, without which the bank would become non-viable, is necessary or a public sector injection of capital, without which the bank would become non-viable, is made).

Due to the implementation on 1 January 2013 of the first measures set by the Basel III Accord, some hybrid securities previously issued by banks will no longer qualify as Tier 1 capital and the issue of BCCS could help banks improve their ratio. It is likely that some banks will launch in the first months of 2012 liability management transactions whereby holders of existing hybrid securities will be offered to exchange such securities for newly issued BCCS.

1. EBA Recommandation (EBA/REC/2011/1) 


Marc-Etienne Sébire 
Head of Capital Markets

Valérie Charreton 


Picture of Marc-Etienne Sebire
Marc-Etienne Sébire