These bonds, known as Additional Tier One capital, or colloquially as CoCos, are complex and risky: When a bank gets in serious trouble, the chances are investors will lose everything. But banks and regulators will spend a lot of time and energy trying to ensure big banks don’t fail and the yield on these bonds is generous enough to attract generalist as well as specialist money.
It is easy to point and chuckle at investors who pile back into an asset class that’s just handed them brutal losses, but there are sound reasons behind the roaring success of this week’s US$3.5 billion junior bond sales from UBS Group AG.
Even investors who got burned when the Swiss government forced Credit Suisse Group AG to write off US$17 billion of such bonds in March ahead of its rescue by UBS have bought into the new deal. That sounds like the definition of monetary masochism, but there’s a string of differences in the bonds and in markets that helped the two-part UBS trade attract US$36 billion in orders.
