barclays european banks the coco handbook vol 3

Credit Research20 March 2014

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 45

European Banks

The CoCo Handbook Vol. 3 The CoCo market has continued to grow with seven new CoCos coming to the market since the last publication of the CoCo Handbook in January 2014. In this report, we analyze issuance expectations by bank, discuss coupon risk in AT1 CoCos, update a series of questions and answers aimed at easing the task of differentiating among CoCos, and provide one-page summaries of each outstanding CoCo.

More growth to come. We expect the CoCo market to continue growing with more securities to come from both existing and new issuers this year. Among the major banks that have so far remained on the sidelines, Deutsche Bank indicated that it intends to issue 5bn of AT1 by the end of 2015, HSBC is seeking shareholder approval at its AGM in May to issue equity conversion CoCos, and Unicredit will issue the first Italian bank AT1 this year. Overall, we expect banks in our coverage universe to issue another 80bn of CoCos in the coming years.

Back-loaded coupon risk in AT1 CoCos. Restrictions on distributions triggered by breaching minimum CET1 ratio levels are an important concern for AT1 coupons, but the risk is back-loaded, in our view. We believe that the risk of potential coupon restrictions is negligible currently, given the very high capital cushions versus CET1 minimums. However, this risk is likely to grow over the next five years as the minimum CET1 buffers are phased in.

CoCo Q&A. We update a series of questions and answers on the CoCo market to help navigate the significant variation that exists between structures. For example, which CoCos allow principal to be written back up? Which CoCos do not have regulatory call options? Which banks have large capital buffers above their CoCo trigger ratios? The answers are inside.

A one-page profile for each CoCo. The CoCo market increased by 25% in Q1 2014, with all except one of the new issues being Additional Tier 1, and totals 47bn. As a result, there are now 32 issues outstanding. We provide a one-page profile for each of these.

FIGURE 1 The European bank CoCo market continues to grow, mn

Source: Barclays Research

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Senior CoCos

Tier 2 CoCos

AT1 CoCos

European Banks Jonathan Glionna +44 (0)20 3555 1992 [email protected] Christy Hajiloizou +44 (0)20 3134 2992 [email protected] Yulia di Mambro +44 (0)20 7773 4295 [email protected] Credit Strategy Dominik Winnicki +44 (0)20 3134 9716 [email protected] Shobhit Gupta +1 212 412 2056 [email protected] www.barclays.com

Barclays | European Banks

20 March 2014 2

Overview Since the most recent publication of the CoCo Handbook in January 2014, the CoCo market has continued to grow, with six Additional Tier 1 (AT1) and one Tier 2 CoCo issued. More notably, new issuers continued to access the market including: Nationwide with the first sterling-denominated AT1 CoCo; Santander with a low-trigger equity-conversion AT1; Danske Bank with a high-trigger temporary principal write-down structure; and KBC with a low-trigger temporary principal write-down structure. These securities, and the 28 other CoCos issued to date, are summarised in Figure 2. A number of major European banks have remained on the sidelines such as HSBC, Deutsche Bank and BNP Paribas. In this report, we discuss the likely further issuance among the major European banks that we cover as well as coupon cancellation risk. We also update the list of questions and answers we introduced in the previous publication of the Handbook and one-page profiles for each CoCo.

FIGURE 2 European bank CoCos outstanding

Issue date Security Ranking Ccy Size, mn Call date Trigger Loss-absorption mechanism Profile page

Dec-09 LLOYDS ECNs T2 Various 9,951 - 5.0% Equity conversion 33

Mar-10 RABOBK 6 7/8% 03/19/20 Senior EUR 1,250 - 7.0% Principal writedown (partial) 36

Jan-11 RABOBK 8 3/8% Perp T1 USD 2,000 Jul-16 8.0% Principal writedown (progressive) 37

Feb-11 CS 7 7/8% 02/24/41 T2 USD 2,000 Aug-16 7.0% Equity conversion 23

Nov-11 RABOBK 8.4% Perp T1 USD 2,000 Jun-17 8.0% Principal writedown (progressive) 38

Feb-12 UBS 7 % 02/22/22 T2 USD 2,000 Feb-17 5.0% Principal writedown (full) 42

Mar-12 CS 7 1/8% 03/22/22 T2 CHF 750 Mar-17 7.0% Equity conversion 24

Jul-12 CS 9 % Perp T1 USD 1,725 Oct-18 7.0% Equity conversion 25

Aug-12 UBS 7 5/8% 08/17/22 T2 USD 2,000 - 5.0% Principal writedown (full) 43

Nov-12 BACR 7 5/8% 11/21/22 T2 USD 3,000 - 7.0% Principal writedown (full) 16

Jan-13 BKIR 10% 07/30/16 T2 EUR 1,000 - 8.125% Equity conversion 22

Jan-13 KBC 8% 01/25/23 T2 USD 1,000 Jan-18 7.0% Principal writedown (full) 31

Apr-13 BACR 7 % 04/10/23 T2 USD 1,000 Apr-18 7.0% Principal writedown (full) 17

May-13 UBS 4 % 05/22/23 T2 USD 1,500 May-18 5.0% Principal writedown (full) 44

May-13 BBVASM 9% Perp T1 USD 1,500 May-18 7.0% Equity Conversion 20

Aug-13 CS 6.5% 08/08/23 T2 USD 2,500 - 5.0% Principal writedown (full) 26

Sep-13 CS 6% Perp T1 CHF 290 Sep-18 5.125% Principal writedown (full) 27

Sep-13 SOCGEN 8 % Perp T1 USD 1,250 Nov-18 5.125% Temporary writedown/writeup 40

Sep-13 CS 5 % 09/18/25 T2 EUR 1,250 Sep-20 5.0% Principal writedown (full) 28

Sep-13 ACAFP 8 1/8% 09/19/33 T2 USD 1,000 Sep-18 7.0% Principal writedown (full) 14

Oct-13 POPSM 11 % Perp T1 EUR 500 Oct-18 5.125% Equity conversion 35

Nov-13 BACR 8.25% Perp T1 USD 2,000 Dec-18 7.0% Equity conversion 18

Dec-13 BACR 8% Perp T1 EUR 1,000 Dec-20 7.0% Equity conversion 19

Dec-13 CS 7 % Perp T1 USD 2,250 Dec-23 5.125% Principal writedown (full) 29

Dec-13 SOCGEN 7 7/8% Perp T1 USD 1,750 Dec-23 5.125% Temporary writedown/writeup 41

Jan-14 ACAFP 7 7/8% Perp T1 USD 1,750 Jan-24 5.125&7% Temporary writedown/writeup 15

Feb-14 UBS 4 % 2026 T2 EUR 2,000 Feb-21 5.0% Principal writedown (full) 45

Feb-14 BBVASM 7% Perp T1 EUR 1,500 Feb-19 5.125% Equity conversion 21

Mar-14 NWIDE 6 7/8% Perp T1 GBP 1,000 Jun-19 7.0% CCDS conversion 34

Mar-14 SANTAN 6 % Perp T1 EUR 1,500 Mar-19 5.125% Equity conversion 39

Mar-14 DANBNK 5 % Perp T1 EUR 750 Apr-20 7.0% Temporary writedown/writeup 30

Mar-14 KBCBB 5 5/8% Perp T1 EUR 1,400 Mar-19 5.125% Temporary writedown/writeup 32 Source: Barclays Research


20 March 2014 3

More growth to come The CoCo market increased by 25% in Q1 2014, with all except one of the new issues being Additional Tier 1, and now totals 47bn. As a result, there are currently 17 AT1 instruments from 11 issuers, 14 Tier 2 CoCos from seven issuers and one senior CoCo from Rabobank currently outstanding. Despite this significant growth, the CoCo market is still showing few signs of standardisation, with the main differing structural features being the capital trigger and mechanism of loss absorption. However, there are clear structural preferences for AT1 securities emerging across European countries with issuers from the same country generally producing similarly-structured instruments. The structures are influenced by regulatory requirements as well as tax treatment. Figure 3 shows that out of the six European countries that have AT1 issuers to date, three adopted the principal write-down loss absorption mechanism and two equity conversion, with Switzerland having both equity conversion and principal write-down structures.

FIGURE 3 Existing Additional Tier 1 CoCos loss absorption structure


We expect the CoCo market to continue growing, with the majority of new CoCo issuance likely to be in the form of AT1 since CRD IV does not require Tier 2 instruments to have trigger-based loss absorbency, and only Swiss banks get regulatory credit for issuing Tier 2 CoCos. Furthermore, with only Lloyds and KBC so far filling the whole 1.5% of RWAs CRD IV requirement for AT1 capital, we expect both repeat issuers and new entrants to come to the market this year. Figure 4 summarises the commentary we have heard on AT1 issuance from the European banks that we cover, with banks generally indicating that they intend to meet the 1.5% of RWA requirement through issuing new-style AT1 as old-style instruments gradually lose capital credit. With equity conversion instruments generally requiring shareholder approval, we believe that AGM resolutions are another good source for understanding future issuance plans, including the likely loss-absorption structure.

Equity conversion AT1Principal write-down AT1


20 March 2014 4

Among the major banks that have so far remained on the sidelines, Deutsche Bank indicated that it intends to issue 5bn of AT1 by the end of 2015 and is likely to replace all 11bn of existing old-style Tier 1 capital over time to support its leverage ratio. So far, the main impediment to issuance for German banks has been lack of regulatory clarity, with tax treatment of instruments an additional uncertainty. However, Deutsche Bank continues to expect to start issuance this year with a principal write-down structure more likely than equity conversion. HSBC indicated that it intends to meet the regulatory AT1 and Tier 2 minimum requirements, as grandfathered instruments lose capital credit, and will ask for shareholder approval to issue equity-conversion instruments at the AGM on 23 May. Just under 3bn of HSBCs old style Tier 1 securities callable in the next 20 months have interest step-ups and, hence, would lose capital credit on the first call date. Furthermore, HSBC has just under 7bn of retail preference shares with coupons in excess of 6%, which can be called in 2014 and 2015 (Figure 5). We, therefore, believe HSBC is likely to come to the market and start replacing these as soon as it gets shareholder approval. Standard Chartered is also seeking shareholder approval to issue equity conversion CoCos at this years AGM, but currently has no imminent plans to access the market and is unlikely to issue before the fourth quarter this year.

Among other banks that have yet to issue, Unicredits CEO recently told reporters that the bank intends to issue AT1 instruments this year, which would make it the first among Italian banks; given the lack of shareholder approval to issue equity conversion instruments, we believe this is likely to have a principal write-down structure. BNP Paribas and Commerzbank are not under pressure to imminently issue CoCos and have not explicitly talked about it, but they are likely to fill the regulatory requirement over time, in our opinion. RBS is another bank with a high proportion of its existing Tier 1 capital having high coupons and being callable this year. However, we believe the bank is likely to refrain from issuing CoCos until its fully loaded Basel 3 CET1 ratio improves from the last reported 8.6%.

Spanish and French banks, which have already accessed the market, are likely to continue issuing AT1 securities, in our opinion. For example, Santander and BBVA need another 6bn and 2.5bn of AT1 to fill the 1.5% of RWAs requirement and already have shareholder approval to issue up to 10bn and 12bn of equity conversion instruments, respectively. Swiss banks, on the other hand, are likely to issue just under 6bn of low-trigger Tier 2 CoCos in order to comply with their 2019 Swiss progressive capital requirements. Figure 6 summarises our estimates for further CoCo issuance for the European banks that we cover, excluding Lloyds, based on either the 1.5% of RWAs requirement, leverage ratio needs, or Swiss capital rules. Overall, we expect these banks to issue just under 80bn of CoCos in the coming years.

FIGURE 4 European bank commentary on Additional Tier 1 capital

Bank Quote

BBVA

First of all, we continue building the capital blocks towards the adequate endowment of a total capital ratio. As we have publicly mentioned, we plan to do this capital management smoothly, profiting from a sound starting point and capital base stability. Specifically, the endowment of the target 1.5% of additional Tier 1 bucket allows financial institution to achieve an efficient management of capital as also add value to the already strong BBVA capital base.

BNP Paribas [..] we have a clear Basel III pattern at the moment with the 1.5% of [old style] hybrid Tier 1, 2% of Tier 2 and so we have based our plan on the assumption that we would stay there [...]

Commerzbank

At the end of 2013, our leverage ratio under CRD4 fully phased-in, stood at 3.3%. Under phased-in, this ratio increased to 4.3% both clearly exceeding the current proposed minimum. Please keep in mind that our current calculations are cautious and do not incorporate any possible issuance of eligible additional Tier 1 or other measures [...]


20 March 2014 5

Bank Quote

Credit Agricole Hybrid debt, of course, we will contemplate regarding the situations in market to ensure more of additional Tier 1 since the first one is a big success.

Credit Suisse

We completed the exchange of CHF 3.8 billion of hybrid tier 1 notes into high-trigger capital instruments, successfully issued CHF 6 billion of low-trigger capital notes and are now just approximately CHF 3 billion away from meeting the Swiss 2019 progressive capital requirement.

Deutsche Bank We want to issue 5 billion by the end of 2015. And again, I can only say from my seat, we definitely expect to be put in a position that we can start issuing in 2014, so our willingness is definitely there.

HSBC

Under CRD IV, banks should maintain a Pillar 1 tier 1 buffer of 1.5% of RWAs and a tier 2 buffer of 2.0% of RWAs. Going forward, as the grandfathering provisions fall away, we intend to meet these buffers in an economic manner by issuing non-equity capital as necessary.

RBS We expect further Tier 2 issuance of this $2 billion left to do. We're still weighing up additional Tier 1. We're not in any rush to do any so this year

Santander [..] we should issue around 3.5%, 1.5%, additional Tier 1 and 2% Tier 2 in the next five years, let's say.

Societe GeneraleRegarding the Tier 1 ratio, the Tier 1 ratio, after two hybrid debt issuance stand at 11.8% [including gradfathered Tier 1]. In terms of total capital, we are now at 13.4% and the target as you know to be in the range between 14% and 15%.

UBS

Impact of planned future actions on the leverage ratio: low-trigger loss absorbing capital issuance (2014-2019) 40-45bps (total CHF 9 billion of low-trigger loss-absorbing capital based on 17.5% fully applied total capital requirement expectation); high-trigger loss-absorbing capital issuance (2014-2019) 20-25bps (based on guidance of total 150bps of high-trigger loss-absorbing capital ratio from deferred compensation programs over the next 4 years and our RWA target of


20 March 2014 6

Back-loaded coupon risk in AT1 CoCos Restrictions on distributions triggered by breaching minimum CET1 ratio levels are an important concern for AT1 coupons, but the risk is back-loaded, in our view. We believe that currently the risk of potential coupon restrictions is negligible, given the very high capital cushions versus CET1 minimums. However, this risk is likely to grow over the next five years as the minimum CET1 buffers are phased in and capital cushions versus CET1 minimums trend towards relatively small 2-3% targets recently indicated by some of the banks.

We think that some of the recently issued NC5 AT1s look attractive relative to matched T2 CoCos and relative to longer-dated AT1s. We recommend:

Buy SOCGEN 8.25 18-perp versus ACAFP $8.125 18-33 (pick up c.150bp, similar duration to call, take out 6pts, similar capital cushion to conversion, similar ratings, better conversion mechanism).

Buy RABOBK AT1 CoCos versus RABOBK $6.875 20 senior CoCo (pick up c.90bp, shorter duration and high likelihood of call, take out 5pts, potentially better outcome on conversion).

Buy KBC AT1 versus KBC T2 CoCo (pick up c.180p, extend duration to call by one year, take out 14pts, better conversion cushion, better conversion mechanism).

Optional coupon deferral is not a material risk Similar to traditional Tier 1 instruments, AT1 CoCos give the issuer an option to cancel the coupons at their discretion at any time (with some caveats for Swiss AT1s). Importantly, with CRD IV disallowing coupon deferral/pusher language in CoCos, cancelling coupons on these securities imposes no restrictions on the issuer. This has led to concerns about optional deferrals; however, we believe the risk of banks voluntarily deferring coupons on CoCos is limited. The amount of money saved by deferring coupons is negligible in the context of capital requirements assuming AT1s account for 1.5% of RWAs and assuming an average coupon of 7%, one year of coupon deferral improves CET1 ratio by c.0.1pp (1.5% * 7%), which is far from what the bank is likely to need in distress. At the same time, cancelling coupons would likely be a very negative signal to the market, potentially hampering other measures of raising capital. Indeed, during the credit crisis, most deferrals were either regulator mandated (RBS, Lloyds) or were undertaken in conjunction with liability management trades (Citi).

Restrictions on distributions is a bigger concern for AT1 coupons Mandatory restrictions on discretionary payouts, enforced under CRD IV, pose a bigger risk to AT1 CoCo coupons, in our view. Under the new rules, if a bank breaches its combined buffer requirement,1 it is subject to limitations on its discretionary distributions. In such a scenario, the Maximum Distributable Amount (or MDA), which includes equity and AT1 dividends as well as discretionary payouts to employees, is capped at a certain percentage of the banks distributable earnings since the last distribution. The cap percentage ranges from 60% to 0% based on the extent to which the combined buffer requirement has been breached (please see European Banks: Three-dimensional capital, 25 November 2013 for more details). Under Swiss regulations, there is no automatic statutory restriction on distributions similar to that in CRD4, although regulators can enforce AT1 coupon suspensions for a bank not meeting CET1 minimum requirement.

1 Defined as the sum of the capital conservation buffer, G-SII buffer, O-SII buffer, countercyclical capital buffer and systemic risk buffer.

Dominik Winnicki +44 (0)20 3134 9716 [email protected] Shobhit Gupta +1 212 412 2056 [email protected]


20 March 2014 7

With most institutions already conforming to the 2019 capital requirement even as the official capital guidelines are gradually phased-in (we show the CRD IV phase-in schedule in Figure 7), we believe the restriction on discretionary payments is unlikely to be relevant in the medium term. However, we expect this to become an important consideration by 2019 when the capital buffer requirements are fully phased-in, thereby increasing the capital threshold at which coupons would be restricted (Figure 8).

FIGURE 7 Capital requirement phase-in EU banks under CRD IV

FIGURE 8 Minimum CET1 requirement will grow over time, while conversion triggers remain fixed

Source: CRD4, Barclays Research Note: We show the minimum CET1 ratio as an area chart to reflect regulators ability to set the size of additional buffers within preset ranges. Source: CRD4, Barclays Research

Distance to potential coupon restrictions The capital buffer before a banks discretionary distributions become restricted is an important factor in AT1 CoCos valuation, in our view. This distance can be calculated as the difference between the banks CET1 ratio and the total minimum CET1 capital requirement (adjusting for the presence of T1 and T2 capital) at a given point in time.

Currently, restrictions on distributions are unlikely to be relevant. The capital buffer to when they kick in is either very high (Swiss banks) or not applicable at all (other AT1 CoCo issuers), given that the security would be converted before the coupons would likely be switched off (conversion triggers are higher than potential coupon restrictions triggers).

Conversion risk is currently significantly higher than the risk of coupon cancellation. Figure 9 shows the current conversion cushions, ie, the expected amount of capital as percentage of RWA that the bank would have to lose for the conversion to be triggered, are much smaller.

However, the coupon cancellation risk is likely to grow over the next five years as the minimum CET1 buffers are being phased in. Figure 9 shows the expected level of coupon restriction cushion ie, the amount of capital as a percentage of RWA that the bank would have to lose for the potential coupon restrictions to be triggered, in 2019. This is based on the difference between CET1 ratio targets indicated by the banks in their recent public announcements and the expected minimum CET1 requirements.2 Notably, the average

2 We assumed the minimum comprised of 4.5% minimum CET1, 2.5% capital conservation buffer and SIFI buffers currently indicated by the regulators; we left countercyclical buffers at zero, with the only exception being DANBNK, for which the countercyclical buffer stands at 0.3% currently; for UK banks, we took into account the CET1 component of the Pillar 2A requirement.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013 2014 2015 2016 2017 2018 2019

Minimum Capital conservation buffer

G-SIFI (range) Countercyclical buffer (range)

CET1 ratio

0%

2%

4%

6%

8%

10%

12%

14%

2013 2014 2015 2016 2017 2018 2019

Min total CET1 ratio Conversion trigger

CET1 ratio

Conversion triggersremain unchanged

Coupon cancellation trigger increases

High trigger

Low trigger


20 March 2014 8

expected coupon restriction cushion is likely to be around 2.7% of RWAs in 2019 much lower than current levels. Given that coupons are deferrable only for AT1s and not T2s, the decreasing buffer supports AT1-T2 CoCo decompression in the longer term. In addition, the fact that coupon cancellation risk is back-loaded supports steepness in AT1 CoCo curves.

FIGURE 9 Coupon restrictions and conversion cushions now and in 2019

Current 2019

Ratio Conversion

cushion Coupon restrictions

cushion

Ratio Conversion

cushion Coupon restrictions

cushion

UK

LLOYDS 10%* 3% N/a 11.0% 4.0% 3.4%

BACR 9.3%* 2.3% N/a 12.0% 5.0% 1.6%

NWIDE 13.1%* 6.1% N/a 11.0% 4.0% 3.4%

Swiss

CS 16.0% 13.8% 12.0% 11.0%** 9.0% 1%

French

SOCGEN 10.0% 4.9% N/a 10.0% 4.9% 2.0%

ACAFP 11.9% 5.6% N/a 14.0% 7.0% 5.5%

Spanish

SANTAN 11.7% 6.6% N/a 9.0% 3.9% 1.0%

BBVASM 11.6% 6.4% N/a 10.0% 4.9% 2.0%

Other countries

DANBNK 14.7% 7.7% N/a 13.0% 6.0% 2.7%

KBC 12.8% 8.5% N/a 11.0%** 6.7% 4.0%

Average 12.1 6.5% 12% / N/a 11.1% 5.4% 2.7% Note: * UK bank AT1 CoCos have triggers based on fully-loaded Basel 3. ** For CS and KBC we assume a 1% CET1 ratio buffer above stated target minimums. Source: Barclays Research

The conversion risk may also grow, but at a much slower pace. Assuming the banks stick to their CET1 targets, the average expected conversion cushion in 2019 will be 5.4% versus 6.5% currently (Figure 9). This is due to the increasingly restrictive definition of CET1 capital that will be gradually phased in between 2014 and 2019.

Consequently, in 2019 we expect the coupon restriction cushion (2.7%) to be materially smaller than the conversion cushion (5.4%). Furthermore, coupon cancellation risk may increase further relative to conversion risk if regulators increase required CET1 buffers. With banks likely to maintain some relatively constant safety buffer over the minimum capital requirements, an increase in CET1 capital targets would keep the coupon restriction cushions close to current levels but would lead to a further increase in conversion cushions. This dynamic would provide further support for AT1 underperformance versus T2s.

Implications Coupon cancellation risk should remain negligible at least until 2017 for low trigger AT1 CoCos and 2018 for high-trigger bonds, favouring the recent non-call-5 AT1s. Under a rather conservative assumption that CET1 buffers (including the capital conservation, countercyclical and SIFI buffer) start to be phased-in in 2016 at a full rate of 0.625pp per year until 2019, the total minimum CET1 ratio will go above the low trigger (5.125%) only in 2016 and above the high trigger (7%) in 2017. We think that it would take at least one more year for the CET1 minimums to grow above the conversion triggers, enough to make coupon cancellation risk materially distinct from the conversion risk. This suggests that the


20 March 2014 9

risk of coupon cancellation in AT1s callable in 2018-19 should be very low and more pronounced in AT1 with longer calls.

To put some rough numbers on this risk, if we assume that the risk of entering a coupon cancellation period is 0% in the next three years and a very pessimistic 20%3 in each of the following years, then the expected loss due to potential coupon cancellation in a non-call-5 bond with 7% coupon is 2.8pts (2 years * 7% coupon * 20% probability of coupon loss), which translates into a required spread premium of 56bp (2.8pts divided by 5-year tenor). A similar calculation for a NC10 AT1 suggests a spread premium of c.100bp (7 years * 7% coupon * 20% probability of coupon loss / 10-year tenor).

These rough estimates contrast materially with the valuations we currently see in the market. Examples include:

SOCGEN $8.25% 18 AT1 CoCo (5.125% trigger, temporary write-down, back-end spread of 640bp) currently trades more than 150bp wider than average T2 CoCo spread and c.150bp wider than ACAFP $8.125% 18-33 CoCo (7% trigger, full writedown), in particular. As it stands now, SOCGEN $8.25% is likely to be called on the first call date, given a high back-end spread of 640bp. We see plenty of room for this spread differential to compress.

This also supports our SOCGEN AT1 CoCo steepener trade idea (Hybrid Capital: CoCo Steepeners, 5 February) from the fair value perspective, the NC10 AT1 CoCo should trade materially wider than the NC5 in spread terms to reflect the back-loaded coupon cancellation risk. This is in stark contrast with the fact that this curve remains slightly inverted.

We recommend buying SOCGEN 8.25 18-perp versus ACAFP $8.125 18-33 pick up c.150bp, similar duration to call, take out 6pts, similar capital cushion to conversion, similar ratings, better conversion mechanism.

RABOBK $8.4 17 and $8.375 16 AT1 CoCos (8%-trigger, partial writedown) trade c.90bp wide off the RABOBK $6.875 20 senior CoCo. Given that restrictions on discretionary payouts are highly unlikely to become a constraint before the first call dates on these bonds, we believe this spread differential has room to compress. Note that the RABOBK AT1s are highly likely to be called given the very high back-end spreads in excess of 700bp.

We recommend buying RABOBK AT1 CoCos versus RABOBK $6.875 20 senior CoCo - pick up c.90bp, shorter duration and high likelihood of call, take out 5pts, potentially better outcome on conversion.

KBC 5.625 19 AT1 CoCo (5.125% trigger, temporary writedown) currently trades c.180bp wide off the KBC T2 CoCo (7% trigger, full writedown). In our view, this is also in excess of the fair compensation for the coupon cancellation risk, especially if we take into account that the T2 CoCo has a materially lower conversion cushion, given the higher trigger. That said, we are more cautious on the likelihood of the call on the first call date for the AT1, given that the bond came to the market recently with a back-end spread of c.470bp, which could prove relatively low from an extension risk perspective in the future.

We recommend buying KBC AT1 versus KBC T2 CoCo pick up c.180bp, extend duration to call by one year, take out 14pts, better conversion cushion, better conversion mechanism.

3 In The CoCo Handbook Vol. 2, 10 Jan, we mentioned that given an average T1-T2 spread differential around 130bp priced in the market at that time and assuming that the typical loss in case of coupon cancellation is in the order of 20pts (8% coupon for a typical deferral period of 2.5 years), the market prices in 6.5% annual probability of a bank going into a coupon cancellation period.


20 March 2014 10

CoCo Q&A The CoCo market has grown without the standardisation that often accompanies the acceleration of other new capital markets and is notable for the diversity of the securities available. This presents opportunities to select the best structures, but also uncertainty regarding which securities include select features. To alleviate some of this uncertainty, we update a series of questions and answers about existing CoCos that we first presented in the CoCo Handbook in January 2014.

FIGURE 10 Which CoCos have


Coupons Optional redemption

Adjustable coupons based

on rating agency

methodology events?

Dividend stoppers and/or

pushers?

Mandatory coupons?

Callable within the

next 3 years?

Regulatory call?

High back-end reset spreads?

LLOYDS ECNs 9 9 - - 9 - 9 -RABOBK 6 7/8% 2020 - 9 - - 9 - - -RABOBK 8 3/8% Perp - - - 9 - 9 9 9CS 7 7/8% 2041 - - - - 9 9 9 9RABOBK 8.4% Perp - - - - - 9 9 9UBS 7 % 2022 - - - - 9 9 9 9CS 7 1/8% 2022 - 9 - - 9 9 9 9CS 9 % Perp - - - 9 - - 9 9UBS 7 5/8% 2022 - - - - 9 - 9 -BACR 7 5/8% 2022 9 - - - 9 - 9 -BKIR 10% 2016 - 9 - - 9 9 - -KBC 8% 2023 - - - - 9 - 9 9BACR 7 % 2023 - - - - 9 - 9 9UBS 4 % 2023 - - - - 9 - 9 -BBVASM 9% Perp - - - - - - 9 9CS 6.5% 2023 9 - - - 9 - 9 -CS 6% Perp - 9 - 9 - - 9 9SOCGEN 8 % Perp - - - - - - 9 9CS 5 % 2025 - 9 - - 9 - 9 -ACAFP 8 1/8% 2033 - - 9 - 9 - 9 9POPSM 11 % Perp - 9 - - - - 9 9BACR 8.25% Perp - - - - - - 9 9BACR 8% Perp - 9 - - - - 9 9CS 7 % Perp - - - 9 - - 9 -SOCGEN 7 7/8% Perp - - - - - - 9 -ACAFP 7 7/8% Perp - - - - - - 9 -UBS 4 3/4% 2026 9 9 - - 9 - 9 -BBVA 7% Perp - 9 - - - - 9 -NWIDE 6 7/8 Perp - 9 - - - - 9 -DANBNK 5 3/4 Perp - 9 - - - - 9 -KBCBB 5 5/8 Perp - 9 - - - - 9 -

Outstanding amount

greater than or equal to

$2.5bn?

Currency other than

$?


20 March 2014 11



Trigger based on Basel 2?

Trigger based on phase-in Basel 3?

Trigger based on fully loaded

Basel 3?

Low trigger (5% or

5.125%)?

High trigger

(7%, 8%, 8.125%)?

Multiple capital ratio-based

triggers?

Contractual PoNV?

If not contractual, mention of statutory

PoNV?LLOYDS ECNs 9 - - 9 - - - -RABOBK 6 7/8% 2020 9 - - - 9 - - -RABOBK 8 3/8% Perp 9 - - - 9 - - -CS 7 7/8% 2041 - 9 - - 9 - 9 -RABOBK 8.4% Perp 9 - - - 9 - - 9UBS 7 % 2022 - 9 - 9 - - 9 -CS 7 1/8% 2022 - 9 - - 9 - 9 -CS 9 % Perp - 9 - - 9 - 9 -UBS 7 5/8% 2022 - 9 - 9 - - 9 -BACR 7 5/8% 2022 - 9 - - 9 - - 9BKIR 10% 2016 - 9 - - 9 - 9 -KBC 8% 2023 - 9 - - 9 - - 9BACR 7 % 2023 - 9 - - 9 - - 9UBS 4 % 2023 - 9 - 9 - - 9 -BBVASM 9% Perp - 9 - 9 9 9 9 -CS 6.5% 2023 - 9 - 9 - - 9 -CS 6% Perp - 9 - 9 - - 9 -SOCGEN 8 % Perp - 9 - 9 - - - 9CS 5 % 2025 - 9 - 9 - - 9 -ACAFP 8 1/8% 2033 - 9 - - 9 - - 9POPSM 11 % Perp - 9 - 9 - 9 - 9BACR 8.25% Perp - - 9 - 9 - - 9BACR 8% Perp - - 9 - 9 - - 9CS 7 % Perp - 9 - 9 - - 9 -SOCGEN 7 7/8% Perp - 9 - 9 - - - 9ACAFP 7 7/8% Perp - 9 - 9 9 9 - 9UBS 4 3/4% 2026 - 9 - 9 - - 9 -BBVA 7% Perp - 9 - 9 - - - 9NWIDE 6 7/8 Perp - - 9 - 9 - - 9DANBNK 5 3/4 Perp - 9 - - 9 - - 9KBCBB 5 5/8 Perp - 9 - 9 - - - 9


20 March 2014 12



Loss-absorption mechanism Estimated capital buffer over trigger

Equity conversion?

Partial principal

reduction?

Principal write-down with

write-back up language?

100% principal

reduction?< 5bn?

5bn -15bn?

> 15bn?

LLOYDS ECNs 9 - - - - - 9RABOBK 6 7/8% 2020 - 9 - - - - 9RABOBK 8 3/8% Perp - 9 - - - - 9CS 7 7/8% 2041 9 - - - - - 9RABOBK 8.4% Perp - 9 - - - - 9UBS 7 % 2022 - - - 9 - - 9CS 7 1/8% 2022 9 - - - - - 9CS 9 % Perp 9 - - - - - 9UBS 7 5/8% 2022 - - - 9 - - 9BACR 7 5/8% 2022 - - - 9BKIR 10% 2016 9 - - - 9 - -KBC 8% 2023 - - - 9 - 9 -BACR 7 % 2023 - - - 9UBS 4 % 2023 - - - 9 - - 9BBVASM 9% Perp 9 - - - - - 9CS 6.5% 2023 - - - 9 - - 9CS 6% Perp - - - 9 - - 9SOCGEN 8 % Perp - 9 9 - - - 9CS 5 % 2025 - - - 9 - - 9ACAFP 8 1/8% 2033 - - - 9 - - 9POPSM 11 % Perp 9 - - - - 9 -BACR 8.25% Perp 9 - - -BACR 8% Perp 9 - - -CS 7 % Perp - - - 9 - - 9SOCGEN 7 7/8% Perp - 9 9 - - - 9ACAFP 7 7/8% Perp - 9 9 - - 9 9UBS 4 3/4% 2026 - - - - - - 9BBVASM 9% Perp 9 - - - - - 9NWIDE 6 7/8 Perp 9 - - - 9 - -DANBNK 5 3/4 Perp - 9 9 - - 9 -KBCBB 5 5/8 Perp - 9 9 - - 9 -


20 March 2014 13

A one-pager for every CoCo


20 March 2014 14

FIGURE 13 ACAFP 8.125% 2033 (EUR)

Bond ACAFP 8 1/8 09/19/33

ISIN USF22797QT87

Issuer CREDIT AGRICOLE SA

Coupon 8.125%

Issue Date 19/09/2013

Amount Issued (mn) USD 1,000

Maturity 19/09/2033

Call date 19-Sep-18 and every 6 months thereafter

Back-end (bp) 5y USD mid-swap + 628.3bp

Ranking Tier 2 debt

Optional coupon deferral Coupons are non-deferrable

Mandatory coupon deferral Not applicable

Payment of deferred coupons Not applicable

Dividend stopper Not applicable

Dividend pusher Not applicable

Contingent trigger Before the implementation date of CRD IV, the core Tier 1 capital ratio of the Credit Agricole Group, and after the implementation date of CRD IV, the CET1 ratio of the Credit Agricole Group falls below 7.0%.

Loss absorption mechanism 100% principal writedown

PoNV In risk factors only

Regulatory call At par plus accrued interest if the notes are fully excluded from the Tier 2 capital of the issuer

Substitution/variation Not applicable

Call notice period No less than 30 nor more than 45 calendar days prior to the call date

Law Law of the State of New York, with the exception of clauses relating to subordination which are governed by French law

Special features Rating Methodology Event. If there is a change in the methodology of S&P as a result of which the equity content assigned by S&P to the securities is materially reduced, the issuer will remove the contingent feature of the bond (which will become a vanilla LT2) and reduce the coupon payable on the bonds by 150bp. The bonds will continue to be callable at par on and after their first call date. Non-payment of amounts when due does not accelerate the maturity of the notes. Unless the ratio of CET1 capital, AT1 bonds and T2 CoCos of the Credit Agricole Group to risk weighted assets on the call date exceeds 11.9%, the issuer must replace the bonds with other securities that qualify for S&P equity content prior to exercising the call on the existing securities.

Source: Prospectus


20 March 2014 15

FIGURE 14 ACAFP 7 7/8% AT1 (USD)

Bond ACAFP 7 7/8 01/29/49

ISIN USF22797RT78

Issuer CREDIT AGRICOLE SA

Coupon 7.875%



Maturity Perpetual

Call date 23-Jan-24 and every 5 years thereafter if the current principal amount is equal to the original principal amount


Ranking Tier 1

Optional coupon deferral Coupons are fully discretionary

Mandatory coupon deferral

Yes, in whole or in part if: 1) coupon payment on these and pari passu securities scheduled for the current financial year would exceed Distributable Items (equal to the Issuer's net income and reserves before payment on Own Funds instruments based on the Issuer's unconsolidated financials; 2) payment of coupons would cause the relevant Maximum Distributable Amount to be exceeded (capital conservation buffer + G-SIFI buffer at either the Group level or the S.A. level); 3) the regulator instructs the issue to cancel the interest payment in whole or in part based on its assessment of the financial and solvency situation

Payment of deferred coupons Deferred coupons are non-cumulative

Dividend stopper None

Dividend pusher None

Contingent trigger The phase-in CET1 ratio of Credit Agricole S.A. falls below 5.125% or if the CET1 ratio of the Credit Agricole Group falls below 7%.

Loss absorption mechanism

Upon a trigger breach, the principal amount of the notes will be reduced pro-rata with any other instruments with similar loss absorption features (write-down or equity conversion), by an amount that is sufficient to restore the relevant capital ratio above 5.125% at S.A. or above 7% at Group. If this is not sufficient to increase the capital ratio to above the trigger event, the notes are written down completely. The principal amount of the notes will be written up, pro-rata with similar loss-absorbing securities and at the full discretion of the issuer, if the issuer reports a consolidated net profit. The amount of net profits used to write up the notes will be proportional to the original principal amount of all similar loss-absorbing securities divided by the total tier 1 capital of the issuer as of the write-up date.

PoNV In risk factors

Regulatory call Yes, at par if the notes are fully excluded from Tier 1 capital provided the current principal amount is equal to the original principal amount.

Substitution/variation

Yes, if either/or: 1)the notes cease to qualify as T1 capital; 2) there is a tax event; 3) there is an Alignment Event (applicable banking regulations have been amended to permit an instrument with material different terms to qualify as AT1 capital.

Call notice period No less than 30 nor more than 45 calendar days prior to the call date.

Law Law of the State of New York, with the exception of clauses relating to subordination which are governed by French law

Special features None Source: Prospectus


20 March 2014 16

FIGURE 15 BACR 7.625% 2022 (USD)

Bond BACR 7 5/8 11/21/22

ISIN US06740L8C27

Issuer BARCLAYS BANK PLC

Coupon 7.625%



Maturity 21/11/2022

Call date Non-callable

Back-end (bp) Not applicable

Ranking Tier 2






Contingent trigger

Prior to CRD IV adoption date, Core Tier 1 ratio of Barclays PLC falls below 7%; post CRD IV adoption date, CET1 ratio on a phase-in basis falls below 7.0%. The phased-in basis CET1 ratio is calculated subject to the transitional arrangements as interpreted by the FSA pursuant to its press release of 26 October 2012 (which envisaged a transition path broadly in line with the CRD IV phase-in arrangements).


100% permanent principal writedown through an Automatic Transfer with noteholders losing all rights against the issuer following the transfer


Regulatory call Yes, at par if the notes are fully excluded from the Group's Tier 2 capital


Call notice period No less than 30 nor more than 60 days prior to the call date

Law Law of the state of New York, except for subordination provisions, which are governed by English law



20 March 2014 17

FIGURE 16 BACR 7.75% 2023 (USD)

Bond BACR 7 3/4 04/10/23

ISIN US06739FHK03

Issuer BARCLAYS BANK PLC

Coupon 7.75%



Maturity 10/04/2023

Call date 10-Apr-18

Back-end (bp) 5yr USD mid swap + 683.3bp

Ranking Tier 2






Contingent trigger

Prior to CRD IV adoption date, Core Tier 1 ratio of Barclays PLC falls below 7%; post CRD IV adoption date, CET1 ratio on a phase-in basis falls below 7.0%. The phased-in basis CET1 ratio is calculated subject to the transitional arrangements as interpreted by the PRA pursuant to the FSA's press release of 26 October 2012 (which envisaged a transition path broadly in line with the CRD IV phase-in arrangements).

Loss absorption mechanism 100% permanent principal writedown

PoNV Acknowledgement of the UK statutory bail-in power in Terms and Conditions

Regulatory call Yes, at par if the notes are fully excluded from the Group's Tier 2 capital



Law Law of the state of New York, except for subordination provisions, which are governed by English law



20 March 2014 18

FIGURE 17 BACR 8.25% AT1 (USD)

Bond BACR 8 1/4 12/29/49

ISIN US06738EAA38

Issuer BARCLAYS PLC

Coupon 8.250%



Maturity Perpetual

Call date 15-Dec-18 and every 5 years thereafter

Back-end (bp) 5yr USD mid swap + 6.705%

Ranking Additional Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable items as defined under CRD IV to pay coupons on these and parity securities; 2) the solvency condition is not satisfied in respect of such coupon payment

Payment of deferred coupons

Non-cumulative



Contingent trigger The fully loaded CRD IV CET1 ratio falls below 7.0%


Conversion into ordinary stock at a fixed price of $2.64 (equivalent to 1.65 on the date of issue) subject to certain anti-dilution adjustments. At the issuer's discretion, the bondholders might receive the shares, cash proceeds from the sale of the shares to shareholders at 1.65 per share (subject to certain anti-dilution adjustments), or a combination of shares and cash.


Regulatory call Yes, if the outstanding aggregate principal amount of the notes ceases to qualify as Tier 1 capital. The call will be exercised at par plus any accrued but unpaid interest (excluding any cancelled coupons).



Law Law of the state of New York, except for subordination provisions and waiver of set-off provisions, which are governed by English law



20 March 2014 19

FIGURE 18 BACR 8% AT1 (EUR)

Bond BACR 8 12/15/49

ISIN XS1002801758

Issuer BARCLAYS PLC

Coupon 8.000%


Amount Issued (mn) EUR 1,000

Maturity Perpetual


Back-end (bp) 5yr EUR mid swap + 6.75%




Yes, in whole or in part if: 1) the bank does not have sufficient distributable items as defined under CRD IV to pay coupons on these and parity securities; or 2) the solvency condition is not satisfied in respect of such coupon payment.


Non-cumulative



Contingent trigger The fully loaded CRD IV CET1 ratio falls below 7.0%


Conversion into ordinary stock at a fixed price of 1.99 (equivalent to 1.65 on the date of issue) subject to certain anti-dilution adjustments. At the issuer's discretion, the bondholders might receive the shares, cash proceeds from the sale of the shares to shareholders at 1.65 per share (subject to certain anti-dilution adjustments), or a combination of shares and cash.


Regulatory call Yes, if the outstanding aggregate principal amount of the notes ceases to qualify as Tier 1 capital. The call will be exercised at par plus any accrued but unpaid interest (excluding any cancelled coupons).



Law Law of the state of New York, except for subordination provisions and waiver of set-off provisions, which are governed by English law



20 March 2014 20

FIGURE 19 BBVASM 9% AT1 (USD)

Bond BBVASM 9 05/29/49

ISIN XS0926832907

Issuer BANCO BILBAO VIZCAYA ARG

Coupon 9.0%



Maturity Perpetual

Call date On 9-May-18 and at any time thereafter


Ranking Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable reserves to pay coupons on these and parity securities; or 2) the bank is in breach of capital requirements; or 3) deferral of the coupons is required by the regulator; or 4) after the date of implementation of CRD IV, payment of the coupons would lead to a breach of capital conservation buffers.




Contingent trigger

Before the implementation date of CRD IV the core Tier 1 ratio, or after the implementation date of CRD IV, the CET1 ratio falls below 5.125%, or

The capital principal ratio falls below 7%, or The EBA core Tier 1 falls below 7%, or The Tier 1 ratio falls below 6% and the bank or the group has

reported losses in each of the previous four quarters with the effect that the capital and reserves of the bank and the group have been reduced by one-third or more, or

The bank becomes non-viable or requires a public capital injections, or

There is a statutory reduction in the capital of the bank.

Loss absorption Conversion into ordinary stock, at the average closing price of the last 5 trading days preceding the delivery of the conversion notice. Conversion price floored at $5.00.

PoNV Contractual PoNV (non-viability is a trigger event under the terms of the CoCo)

Regulatory call Yes, at par if the bonds cease to qualify as: 1) Tier 1 under applicable bank regulation; or 2) Capital Principal to meet the Capital principal ratio; or 3) BCCS to meet the EBA CT1 ratio.


Call notice period Not less than 30 nor more than 60 days notice prior to the redemption date

Law Spanish law

Special features None

Source: Prospectus


20 March 2014 21

FIGURE 20 BBVA 7% AT1 (EUR)

Bond BBVASM 7 12/29/49

ISIN XS1033661866

Issuer BANCO BILBAO VIZCAYA ARG

Coupon 7.0%



Maturity Perpetual

Call date On 19-Feb-19 and at any time thereafter

Back-end (bp) 5y EUR mid-swap + 615.5bp

Ranking Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable reserves to pay coupons on these and parity securities; 2) the bank is in breach of capital requirements; 3) cancellation of the coupons is required by the regulator; 4) payment of the coupons would lead to a breach of the Maximum Distribution Amount (a breach of capital conservation and G-SII buffers).


Deferred coupons are non-cumulative



Contingent trigger The CET1 ratio of the bank or the group falls below 5.125% calculated in accordance with CRR including transitional provisions.

Loss absorption Conversion into ordinary stock, at the average closing price of the last 5 trading days preceding the delivery of the conversion notice. Conversion price floored at 4.50.


Regulatory call Yes, at par if the bonds cease to counted toward's the group's or the bank's Tier 1 capital in whole under applicable bank regulation.



Law Spanish law



20 March 2014 22

FIGURE 21 BKIR 10% 2016 (EUR)

Bond BKIR 10 07/30/16

ISIN XS0862044798

Issuer BANK OF IRELAND

Coupon 10.0%



Maturity 30/07/2016

Call date Non-callable


Ranking Tier 2 bonds






Contingent trigger "Prior to the CRD IV implementation date, the core Tier 1 capital ratio, or after the CRD IV implementation date, the CET1 ratio falls below 8.25%. State aid instruments count towards both the core Tier 1 and the CET1 capital ratio. The CoCos also convert in the event that the bank becomes non-viable."

Loss absorption mechanism Conversion into ordinary stock, at the VWAP during the 30 business days prior to the conversion date. Conversion price floored at EUR0.05

PoNV Contractual PoNV (non-viability is a trigger event under the terms of the CoCo)

Regulatory call None

Substitution/variation Only if a tax event has occurred

Call notice period Not applicable

Law Irish law

Special features Bonds initially issued to the Irish Treasury as part of the public recapitalization of the bank. Entire issue sold to private investors on 9 January 2013. The issuer cannot buy back the notes prior to their maturity date.

Source: Prospectus


20 March 2014 23

FIGURE 22 CS 7.875% 2041 (Buffer Capital Notes, USD)

Bond CS $ 7.875%

ISIN XS0595225318

Issuer CSG GUERNSEY I LTD

Coupon 7.875%



Final Maturity Date 02/24/2041

Call date 08/24/2016; Semi-annual after first call date

Back-end (bp) 5y $ swap +522bp

Ranking Tier 2

Optional coupon deferral No

Mandatory coupon deferral No




Contingent trigger 7% Core Tier 1 ratio prior to Basel 3 Regulations date and Common Equity Tier 1 ratio on or after Basel 3 Regulations date

Loss absorption mechanism 100% Equity Conversion, subject to a floor share price of US$20.00

PoNV Yes in Terms and Conditions

Regulatory call At 102% if the notes cease to be eligible in full as both: 1) Tier 2 capital under BIS regulations; and 2) Buffer Capital under Swiss regulations.

Substitution/variation Yes

Call notice period Not less than 30 days

Law English Law for the BCNs and the Guarantee and any non-contractual obligations arising out of or in connection with the BCNs and the Guarantee. With the exception of the subordination provisions which come under the Island of Guernsey law for the Issuer, CSG GUERNSEY I LTD, and under Switzerland law in the case of Credit Suisse Group.



20 March 2014 24

FIGURE 23 CS 7.125% 2022 (Buffer Capital Notes, CHF)

Bond CS 7 1/8 03/22/22

ISIN CH0181115681

Issuer CSG GUERNSEY IV LTD

Coupon 7.125%


Amount Issued (mn) CHF 750

Maturity 22/03/2022

Call date 22-Mar-17

Back-end (bp) 5y CHF swap +668.5bp

Ranking Tier 2








100% equity conversion at the greater of the average VWAP on 30 consecutive dealing days prior to conversion or the floor price of CHF 20.0


Regulatory call Yes at 102% if the BCNs cease to be eligible in their entirety as both: 1) Tier 2 Capital under BIS Regulations; and 2) Buffer Capital under National Regulations

Substitution/variation Yes upon a Capital or a Tax Event


Law Swiss Law except for the subordination provisions which for so long as CSG Guernsey IV Ltd is the issuer, shall be governed by the laws of the Island of Guernsey



20 March 2014 25

FIGURE 24 CS 9.5% AT1 (Buffer Capital Notes, USD)

Bond CS 9 1/2 07/29/49

ISIN XS0810846617

Issuer CSG GUERNSEY II LTD

Coupon 9.500%



Maturity Perpetual


Back-end (bp) 6mth $ LIBOR+664bp

Ranking Tier 1



Yes if a) coupon and other payments on pari passu ranking Tier 1s exceed the amount of Distributable Profits at CSG and b) the Regulatory Condition (ie, all local applicable capital adequacy requirements on a consolidated basis) is not satisfied or would not be satisfied if coupon payment was made.


Non-cumulative

Dividend stopper Yes

Dividend pusher Yes



100% equity conversion at the greater of the average VWAP on five consecutive dealing days prior to conversion or the floor price of $16.57


Regulatory call Yes at Make Whole if the BCNs cease to be eligible in their entirety as both: 1) Additional Tier 1 Capital under BIS Regulations; and 2) Buffer Capital under National Regulations.


Call notice period Not less than 30 nor more than 60 days notice

Law Swiss Law except for the subordination provisions which for so long as CSG Guernsey II Ltd is the issuer, shall be governed by the laws of the Island of Guernsey



20 March 2014 26

FIGURE 25 CS 6.5% 2023 (USD)

Bond CS $ 6.5%

ISIN XS0957135212

Issuer Credit Suisse

Coupon 6.5%




Call date Not applicable


Ranking Tier 2

Optional coupon deferral Not applicable





Contingent trigger 5% if Groups CET1 ratio + ratio of unconverted high trigger capital instruments outstanding at the time.

Loss absorption mechanism 100% Permanent Principal Writedown


Regulatory call Yes at Par if full disqualification as both: 1) Tier 2 under Basel 3 regs; and 2) as Progressive Capital Component (PCC*) OR at 103% if change in regulation reduces or eliminates the required amount of PCC and the group has more than is required.



Law Swiss Law

Special features The PoNV writedown feature can be removed if a future law provides for capital treatment without it.

Note: * PCC refers to low trigger (5%) capital instruments. Source: Prospectus


20 March 2014 27

FIGURE 26 CS 6% AT1 (CHF)

Bond CS 6 09/29/49

ISIN CH0221803791

Issuer CREDIT SUISSE GROUP AG

Coupon 6.000%


Amount Issued (mn) CHF 290

Maturity Perpetual

Call date 04/09/2018; Annually after first call date

Back-end (bp) 5y CHF swap +520.3bp

Ranking Tier 1



Yes, in whole or in part if 1) coupon and other payments on pari passu ranking Tier 1s exceed the amount of Distributable Profits at CSG; 2) the Regulatory Condition (ie all local applicable capital adequacy requirements on a consolidated basis)is not satisfied or would not be satisfied if coupon payment was made; and 3) the regulator requires CSG to not make such interest payment.


Non-cumulative


Dividend pusher Yes

Contingent trigger Yes, if: 1) the sum of CET1 ratio and Higher Trigger Capital ratio is below 5.125% unless the regulator agrees that the CET1 ratio has been or will be imminently restored to above 5.125% without a write-down; 2) directed by the regulator to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts, or from ceasing to carry on its business; 3) CSG receives support from the Public Sector without which it would have become insolvent, bankrupt, unable to pay a material part of its debts, or unable to carry on its business.


100% Permanent Principal Writedown


Regulatory call Yes at 103% if the notes cease to be eligible in full as both: 1) Additional Tier 1 Capital under BIS regulations and 2) Progressive Component Capital under Swiss regulations; or 3) the notes continue to qualify as Progressive Component Capital, but the minimum required amount is reduced or eliminated.


Call notice period Not less than 30 nor more than 60 days notice

Law Swiss Law



20 March 2014 28

FIGURE 27 CS 5.75% 2025 (EUR)

Bond CS 5.75%

ISIN XS0972523947

Issuer Credit Suisse

Coupon 5.75%




Call date 09/18/2020; Once only call

Back-end (bp) 5y +400bp

Ranking Tier 2






Contingent trigger 5% if Groups CET1 ratio + ratio of unconverted high trigger capital instruments outstanding at the time

Loss absorption mechanism 100% Permanent Principal writedown


Regulatory call Yes at Par if full disqualification as both 1) Tier 2 under Basel 3 regs and 2) as Progressive Capital Component (PCC*) OR at 103% if change in regulation reduces or eliminates the required amount of PCC and the group has more than is required


Call notice period Not less than 30 days

Law Swiss Law

Special features The PONV writedown feature can be removed if a future law provides for capital treatment without it.

Note: * PCC refers to low trigger (5%) capital instruments. Source: Prospectus


20 March 2014 29

FIGURE 28 CS 7.5% AT1 (USD)

Bond CS 7 1/2 12/11/49

ISIN XS0989394589

Issuer CREDIT SUISSE GROUP AG

Coupon 7.500%



Maturity Perpetual


Back-end (bp) 5y $ swap +459.8bp




Yes, in whole or in part if: 1) coupon and other payments on pari passu ranking Tier 1s exceed the amount of Distributable Profits at CSG; 2) the Regulatory Condition (ie, all local applicable capital adequacy requirements on a consolidated basis) is not satisfied or would not be satisfied if coupon payment was made: and 3) the regulator requires CSG to not make such an interest payment.



Dividend pusher Yes

Contingent trigger Yes, if: 1) the sum of CET1 ratio and Higher Trigger Capital ratio is below 5.125% unless the regulator agrees that the CET1 ratio has been or will be imminently restored to above 5.125% without a write-down; 2) directed by the regulator to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts, or from ceasing to carry on its business; 3) CSG receives support from the Public Sector without which it would have become insolvent, bankrupt, unable to pay a material part of its debts, or unable to carry on its business.


100% Permanent Principal Writedown


Regulatory call At par plus accrued but unpaid interest if the notes cease to be eligible in full as both: 1) Additional Tier 1 Capital under BIS regulations and 2) Progressive Component Capital (PCC)* under Swiss regulations; or 3) the notes continue to qualify as Progressive Component Capital, but the minimum required amount is reduced or eliminated.

Substitution/variation In a Tax or Capital Event, issuer is permitted to either substitute all of the notes or vary Terms and Conditions so that the notes remain compliant securities for tax and capital purposes.


Law Swiss law

Special features None Note: * PCC refers to low trigger (5%) capital instruments. Source: Prospectus


20 March 2014 30

FIGURE 29 DANBNK 5.75% AT1 (EUR)

Bond DANBNK 5 3/4 10/31/49

ISIN XS1044578273

Issuer DANSKE BANK A/S

Coupon 5.750%


Amount Issued (mn) EUR 750

Maturity Perpetual

Call date 06-Apr-20 and every semi-annual interest payment date thereafter

Back-end (bp) 5y EUR mid-swap + 464bp

Ranking Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable items to pay coupons on these securities; 2) the payment of coupons on the notes would exceed the Maximum Distributable Amount as defined under CRD IV (breach of capital buffers); 3) cancellation is required by the regulator.




Contingent trigger The CET1 ratio of the issuer and/or the group falls below 7% calculated including transitional provisions


Upon a trigger breach, the principal amount of the notes and all parity trigger loss absorbing instruments will be reduced by an amount that is sufficient to restore the relevant capital ratio above 7%. If this is not sufficient to increase the capital ratio to above 7%, the notes are written down to EUR 0.01. The principal amount of the notes will be written up, pro-rata with similar loss-absorbing securities and at the full discretion of the issuer, if Danske reports a profit, and the write-up does not cause the Maximum Distributable Amount to be exceeded. The amount of net income used to write up the notes will be the lower of the Maximum Distributable Amount and proportional to the original principal amount of all written down additional tier 1 securities divided by the total tier 1 capital of the issuer as at the date of the relevant reinstatement.


Regulatory call

Yes, at the outstanding principal amount , if there is a change in the regulatory classification of the securities that results or will result in them being in whole or in part excluded from the regulatory capital of the issuer and/or the group or reclassified in whole or in part as a lower form of regulatory capital.

Substitution/variation Yes, if the notes cease to qualify as T1 capital or there is a tax event

Call notice period No less than 30 nor more than 60 days prior to the call date.

Law

English law, with the exception of the clauses relating to status, interest cancellation, loss absorption following a trigger event and reinstatement of notes, regulatory call and enforcement events, which are governed by Danish law.



20 March 2014 31

FIGURE 30 KBC 8% 2023 (USD)

Bond KBC 8 01/25/23

ISIN BE6248510610

Issuer KBC BANK NV

Coupon 8.0%



Maturity 25/01/2023

Call date 25-Jan-18 (one-off call)


Ranking Tier 2 debt






Contingent trigger

Prior to the implementation date of CRD IV, the consolidated core Tier 1 ratio of the bank falls below 7.0%. After the implementation date of CRD IV, the consolidated CET1 ratio of the bank falls below 7.0%. In both cases, the capital ratio will be calculated by risk-weighting, rather than deducting, the group's investments in insurance subsidiaries.

Loss absorption 100% principal writedown


Regulatory call At par plus accrued interest, if the bonds are fully excluded from the Tier 2 capital of the issuer or the group.


Call notice period Not less than 15 nor more than 30 calendar days prior to the call date.

Law English law, except for clauses relating to ranking in capital structure, form of the notes and modification of terms and conditions, which are governed by Belgian law.


Source: Prospectus


20 March 2014 32

FIGURE 31 KBC 5 5/8% AT1 (EUR)

Bond KBCBB 5 5/8 12/19/49

ISIN BE0002463389

Issuer KBC GROEP NV

Coupon 5.625%



Maturity Perpetual

Call date 19-Mar-19 and every quarterly interest payment date thereafter


Ranking Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable items to pay coupons on these and parity securities; 2) the payment of coupons on the notes and parity securities would exceed the Maximum Distributable Amount as defined under CRD IV (breach of capital buffers)




Contingent trigger The consolidated CET1 ratio of the group falls below 5.125% calculated in accordance with CRR including transitional provisions


Upon a trigger breach, 1) the interest accrued up to the trigger date will be cancelled; 2) the principal amount of the notes will be reduced pro rata following or concurrently with the write-down or conversion into equity of the entire outstanding principal amount of any prior loss absorbing instruments by an amount that is sufficient to restore the relevant capital ratio above 5.125%. If this is not sufficient to increase the capital ratio to above 5.125%, the notes are written down to 1c. The principal amount of the notes will be written up, pro-rata with similar loss-absorbing securities and at the full discretion of the issuer, if KBC reports a consolidated net income, and the write-up does not cause the Maximum Distributable Amount to be exceeded. The amount of net income used to write up the notes will be proportional to the original principal amount of all written down additional tier 1 securities divided by the total tier 1 capital of the issuer as at the then most recent quarterly financial period end date.


Regulatory call

Yes, at par, but only if the prevailing principal amount is equal to the original principal amount, if there is a change (or prospective change which the lead regulator considers to be sufficiently certain) in regulatory classification of the Securities that has resulted or would be likely to result in them being fully excluded from Additional Tier 1 Capital.

Substitution/variation Yes, if the notes cease to qualify as T1 capital or there is a tax event

Call notice period No less than 30 nor more than 45 days prior to the call date.

Law English law, with the exception of the clauses relating to form, status, meetings and modification which are governed by Belgian law



20 March 2014 33

FIGURE 32 LLOYDS Enhanced Capital Notes (ECNs)

Bond Various GBP, EUR and USD

ISIN Various

Issuer LBG Capital No 1 Plc (Guarantor is Lloyds Banking Group) and LBG Capital No 2 Plc (Guarantor is Lloyds TSB Bank Plc)

Coupon Ranging from 6.385%- 15%


Amount Issued Approximately EUR9bn in total

Final Maturity Date 2019, 2020 and perpetual

Call date Not applicable (except for $ 8% Perpetual; call date 06/15/2020; Quarterly call frequency after first call date)

Back-end (bp) Not applicable (except for $ 8% perpetual; back-end 3m$Libor +640bp)

Ranking LT2, (except for $ 8% perpetual; ranking is UT2)

Optional coupon deferral No

Mandatory coupon deferral No


Dividend stopper No

Dividend pusher No

Contingent trigger 5% Core Tier 1 ratio of Lloyds Banking Group as defined by FSA as at 1 May 2009

Loss absorption mechanism 100% equity conversion at a fixed conversion price of 59.2p

PoNV No

Regulatory call Par, except for the and 15% issues which are make-whole. Call option after a Capital Disqualification event; If the ECNs would no longer be eligible to qualify in whole or in part for inclusion in the Lower Tier 2 Capital of LBG or, as the case may be, LTSB on a consolidated basis; or (2) if as a result of any changes to the Regulatory Capital Requirements or any change in the interpretation or application thereof by the FSA, the ECNs shall cease to be taken into account in whole or in part for the purposes of any stress test applied by the FSA in respect of the Consolidated Core Tier 1Ratio.

Substitution/variation No


Law English Law, except in the case where Lloyds Banking Group is the guarantor (ie, for the notes issued by LBG Capital No 1 Plc), in which case provisions relating to status and subordination of the Guarantee, are governed by Scots Law.



20 March 2014 34

FIGURE 33 NWIDE 6.75% AT1 (GBP)

Bond NWIDE 6 7/8 03/11/49

ISIN XS1043181269

Issuer NATIONWIDE BLDG SOCIETY

Coupon 6.875%


Amount Issued (mn) GBP 1,000

Maturity Perpetual

Call date 20-Jun-19 and every 5 years thereafter

Back-end (bp) 5yr GBP mid swap + 488bps

Ranking Tier 1



Yes, in whole or in part if: 1) the society does not have sufficient distributable items to pay coupons on these and parity securities; 2) the payment of coupons on the notes and parity securities would exceed the Maximum Distributable Amount as defined under CRD IV (breach of capital buffers)


Non-cumulative



Contingent trigger The fully loaded CRD IV CET1 ratio on an individual or consolidated basis falls below 7.0%


Securities are written down to 0 with any accrued and unpaid interest cancelled and replaced with newly issued CCDS at a fixed price of 80 subject to certain anti-dilution adjustments. Fractions of CCDS will not be delivered, and any fractional entitlement would be cancelled. There are currently 550m of CCDS outstanding with nominal value of 100 per CCDS (GB00BBQ33664).

PoNV Acknowledgement of the UK statutory bail-in power in Terms & Conditions

Regulatory call Yes, at par if as a result of a change (or pending change which the Regulator considers to be sufficiently certain) the outstanding aggregate principal amount of the notes fully ceases to qualify as Tier 1 capital.



Law English law


Source: Prospectus


20 March 2014 35

FIGURE 34 POPSM 11.5% AT1 (EUR)

ISIN XS0979444402

Issuer BANCO POPULAR ESPANOL SA

Coupon 11.5%


Amount Issued (mn) EUR 500

Maturity Perpetual

Call date On 10-Oct-18 and at any time thereafter

Back-end (bp) 5yr EUR mid swap + 10.743%




Yes, in whole or in part if: 1) the bank does not have sufficient distributable reserves to pay coupons on these and parity securities; 2) the bank is in breach of applicable banking regulations; 3) cancellation of the coupons is required by the regulator after determining in its sole discretion that the financials or solvency situation of bank requires coupon cancellation; 4) after the date of implementation of CRD IV, payment of the coupons would lead to a breach of the Maximum Distributable Amount (a breach of capital conservation buffer).




Contingent trigger

Before the implementation date of CRD IV the Core Tier 1 ratio, or after the implementation date of CRD IV, the CET1 ratio falls below 5.125%, or the Tier 1 ratio falls below 6% and the bank or the group has reported losses in each of the previous four quarters with the effect that the capital and reserves of the bank or the group have been reduced by one-third or more.

Loss absorption Conversion into ordinary stock, at the higher of 1) Current Market price of Common share, 2)the Floor price of EUR2.015 per share, 3) the nominal value of a common share.


Regulatory call Yes, at par if the bonds cease to qualify as Tier 1 under applicable bank regulation (in full and not part only) subject to the prior consent of the regulator.



Law Spanish law



20 March 2014 36

FIGURE 35 RABOBK 6.875% 2020 (EUR)

Bond RABOBK 6.875%

ISIN XS0496281618

Issuer Rabobank Nederland

Coupon 6.875%




Call date Not applicable


Ranking Senior unsecured






Contingent trigger 7% Equity Capital Ratio (whereby Equity Capital is Total reserves + retained earnings + Member certificates)

Loss absorption mechanism 75% Permanent Principal Writedown

PoNV No

Regulatory call Not applicable

Substitution/variation No


Law Dutch Law



20 March 2014 37

FIGURE 36 RABOBK 8.375% T1 (USD)

Bond RABOBK $ 8.375%

ISIN XS0583302996


Coupon 8.375%


Amount Issued USD 2,000

Final Maturity Date Perpetual


Back-end (bp) 5y Treasury +642.5bp

Ranking Tier 1

Optional coupon deferral Yes fully discretionary

Mandatory coupon deferral Yes if 1) Total Capital falls below the minima and the Equity Capital ratio falls below 8%; 2) to the extent that local solvency rules prohibit payment on the security plus pari passu instruments; 3) if payment on CoCo plus other pari passu instruments exceeds Distributable items; 4) if the Dutch National Bank informs issuer that it believes a solvency event will occur in the three years following coupon payment.

Payment of deferred coupons Non-cumulative

Dividend stopper Yes, if payment of coupon not made, issuer cannot pay dividends on junior securities


Contingent trigger 8% Equity Capital ratio; (whereby Equity Capital is Total reserves + retained earnings + Member certificates)

Loss absorption mechanism Principal writedown, enough to cover capital shortfall. No subsequent write-up; can be written down on more than one occasion

PoNV No

Regulatory call Yes at Par (or prevailing principal amount if written down)


Call notice period Not less than 30 and not more than 60 calendar days

Law Dutch Law



20 March 2014 38

FIGURE 37 RABOBK 8.4% T1 (USD)

Bond RABOBK $ 8.4%

ISIN XS0703303262


Coupon 8.4%



Final Maturity Date Perpetual

Call date 06/29/2017; anytime after first call

Back-end (bp) 5y Treasury +749bp

Ranking Tier 1

Optional coupon deferral Yes fully discretionary

Mandatory coupon deferral Yes if Equity Capital ratio falls below 8%; (whereby Equity Capital is Total reserves + retained earnings + Member certificates)

Payment of deferred coupons Non-cumulative



Contingent trigger 8% Equity Capital ratio (whereby Equity Capital is Total reserves + retained earnings + Member certificates)

Loss absorption mechanism Principal writedown, enough to cover capital shortfall. No subsequent write-up; can be written down on more than one occasion

PoNV In Risk Factors

Regulatory call Yes at Par (or prevailing principal amount if written down)


Call notice period Not less than 30 and not more than 60 calendar days

Law Dutch Law



20 March 2014 39

FIGURE 38 SANTAN 6 % AT1 (EUR)

Bond SANTAN 6 1/4 03/12/49

ISIN XS1043535092

Issuer BANCO SANTANDER SA

Coupon 6.25%



Maturity Perpetual

Call date On 12-Mar-19 and quarterly thereafter

Back-end (bp) 5y EUR mid-swap + 541bp

Ranking Tier 1



Yes, in whole or in part if: 1) the bank does not have sufficient distributable reserves to pay coupons on these and parity securities; 2) the bank is in breach of capital requirements; 3) cancellation of the coupons is required by the regulator; 4) payment of the coupons would lead to a breach of the Maximum Distribution Amount (a breach of capital conservation and G-SII buffers).


Deferred coupons are non-cumulative



Contingent trigger The CET1 ratio of the bank or the group falls below 5.125% calculated in accordance with CRR including transitional provisions

Loss absorption Conversion into ordinary stock, at the volume weighted average price over the last 5 trading days preceding the delivery of the conversion notice. Conversion price floored at 4.34.


Regulatory call Yes, at par if the bonds cease to counted toward's the group's or the bank's Tier 1 capital in whole under applicable bank regulation.



Law Spanish law



20 March 2014 40

FIGURE 39 SOCGEN 8.25% AT1 (USD)

Bond SOCGEN 8 1/4 11/29/49

ISIN XS0867614595

Issuer SOCIETE GENERALE

Coupon 8.25%



Maturity Perpetual

Call date 29-Nov-18 and every 5 years thereafter


Ranking Tier 1



Yes if: 1) directed by the regulator in view of the financial and solvency situation of the issuer; 2) prior to the implementation of CRD IV, the group's total capital ratio has fallen below the minimum or coupon payment would cause it to fall below the minimum; 3) after the implementation of CRD IV, the coupons on this and pari securities:

exceed the amount of distributable reserves (based on individual accounts), or

would cause a breach of capital conservation buffers Payment of deferred coupons Deferred coupons are non-cumulative



Contingent trigger Prior to the implementation of CRD IV, the EBA CT1 ratio fall below 5.125%; after the implementation of CRD IV, the phase-in CET1 ratio of the issuer falls below 5.125%

Loss absorption

Upon a trigger breach, the principal amount of the notes will be reduced pro-rata with any other instruments with similar loss absorption features, by an amount that is sufficient to restore the relevant capital ratio above 5.125%. The principal amount of the notes will be written up, pro-rata with similar loss-absorbing securities and at the full discretion of the issuer, if SocGen reports a consolidated net profit. The amount of net profits used to write up the notes will be proportional to the original principal amount of all similar loss-absorbing securities divided by the total tier 1 capital of the issuer as of the write-up date.


Regulatory call Yes, if the notes cease to qualify as Tier 1 capital partially or fully. The call will be exercised at par minus any applicable writedowns.

Substitution/variation Yes, if the notes cease to qualify as T1 capital or there is a tax event.

Call notice period No less than 30 nor more than 45 calendar days prior to the call date.

Law English law, with the exception of the clauses relating to ranking in the capital structure which are governed by French law



20 March 2014 41

FIGURE 40 SOCGEN 7.875% AT1 (USD)

Bond SOCGEN 7 7/8 12/18/49

ISIN USF8586CRW49

Issuer SOCIETE GENERALE

Coupon 7.875%



Maturity Perpetual



Ranking Tier 1



Yes, in whole or in part if: 1) directed by the regulator in view of the financial and solvency situation of the issuer; 2) prior to the implementation of CRD IV, the group's total capital ratio has fallen below the minimum or coupon payment would cause it to fall below the minimum; 3) after the implementation of CRD IV, the coupons on this and other own funds instruments (not including Tier 2):

exceed the amount of distributable reserves, or would cause a breach of the Maximum Distributable Amount (capital

conservation buffer plus G-SII buffer)




Contingent trigger Prior to the implementation of CRD IV, the EBA CT1 ratio fall below 5.125%; after the implementation of CRD IV, the phase-in CET1 ratio of the issuer falls below 5.125%


Upon a trigger breach, the principal amount of the notes will be reduced pro-rata with any other instruments with similar loss absorption features (write-down or equity conversion), by an amount that

barclays european banks the coco handbook vol 3

Documents

coco handbook

outstanding coco

coco qa

european bank coco market

coco trigger ratios

new cocos

bn of at1

bn of cocos