SEOUL, Nov. 6 (Korea Bizwire) — As the Bank for International Settlements regulation on the capital adequacy ratio is tightened, more and more banks increasingly rely on the issuing of contingent convertible bonds, or CoCo bonds, for their preferred means of procuring capital. That’s because the issuing company doesn’t need to count shares in its calculation of diluted earnings until an investor exercises the option.
According to the Korea Securities Depository on November 5, Industrial Bank of Korea issued CoCo bonds worth 800 billion won on the same day. The ten-year bonds carry an annual rate of 3.10 percent, 0.45 percentage point higher than the ten-year government treasury bonds.
The bank was going to issue the bonds worth 500 billion won but decided to increase the volume due to higher demand with lower spread. On the same day, Kyongnam Bank also succeeded in issuing contingent convertibles worth 150 billion won.
Except for the case in which JB Financial Group failed to issue CoCo bonds in September this year, the recent bids by commercial banks have been wildly successful. The bonds issued by JB Financial Group attracted only a few investors due to concerns over the risk despite the high yield of 6 percent a year. In late September, Busan Bank saw a demand of 150 billion won for CoCo bond issuing of 100 billion won. For Jeonbuk Bank, 60 percent more subscription flooded in for 100 billion won bond issue. Encouraged by the outcome, Kwangju Bank will issue 150 billion won CoCo bonds on November 14 while Woori Bank follows up with 200 billion won bond issuing on December 5.
The main reason for banks to increase their contingent convertible bond issuing rapidly has to do with the fact that the volume of subordinated bonds that will come due early next year is too burdensome. In addition, since the implementation of “Basel III,” the voluntary global regulatory standard on bank capital adequacy, the ratio of existing capital assets being admitted as BIS-sanctioned capital will be reduced by 10 percent every year. For this reason, the banks are trying to maintain their capital adequacy ratios while at the same time procuring capital.
By Sean Chung (email@example.com)