Pacific Investment Management Co., manager of the world’s biggest fixed-income fund, will start a European fund to invest in contingent convertible bonds offered by banks. The Pimco Capital Securities Fund will buy securities including so-called CoCos, as well as Tier 1 and upper Tier 2 debt, both forms of subordinated bonds, the Newport Beach, California-based firm said in a statement today. Shamillia Sivathambu, a Pimco spokeswoman in London, declined to say how much the firm is seeking to raise for the fund.
European regulators are pushing banks to sell CoCo bonds, which automatically convert into equity when capital falls below a pre-set level, to lessen the potential burden of bank failure on taxpayers. Credit Suisse Group AG became the first publicly traded lender to sell the securities to investors when it sold
$2 billion of the securities in February. Swisscanto Asset Management, which oversees about $9.7 billion in investment- grade fixed-income securities, is also opening a fund to buy bank debt.
“Banks are going to be much more like utilities from now on, and they’ll be super-regulated,” Mirko Santucci, head of credit at the Zurich-based money manager, said in a telephone interview today. “I struggle to think that in five years’ time bank shares will be up 40 to 50 percent. CoCos offer coupons of seven, eight, nine percent, so multiply that by five years and you can see the attraction.”
Credit Suisse’s contingent convertibles, which become equity if the bank’s Tier 1 capital ratio falls below 7 percent, pay a 7.875 percent coupon. The Zurich-based lender pays an average of about 4.1 percent on its bond funding, according to data compiled by Bloomberg.
Fleming Family & Partners, which oversees about 4 billion pounds ($6.5 billion), will provide the initial capital for the Pimco fund, the London-based firm said in the same statement. Fleming, which oversees the assets of wealthy families, helped to design the strategy with Pimco, it said.
“CoCos have the potential to create a large new asset class, worth possibly $500 billion, which offers both attractive yield potential,” said Daniel Axmer, a fund manager at Fleming.