A contingent convertible (CoCo) bond is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs. The concept of CoCo has been particularly discussed in the context of crisis management in the banking industry. It has been also emerging as an alternative way for keeping solvency in the insurance industry.

(Bloomberg) — Deutsche Bank’s AT1 securities offer “good long-term value at current prices” but are likely to remain volatile and essentially trade like an Italian bank, CreditSights analyst Simon Adamson wrote in a note.

Says concern about the lender’s financial strength and extension risk on some bonds including its $1.25b 6.25% note, which yields 10.9% to its 2020 call, give rise to questioning whether to avoid its AT1s altogether.

“We would look more to the AT1s with longer calls and higher back ends, and our pick remains the 7.5% $1.5b”

Deutsche Bank is struggling with declining revenues, rigid expenses and high funding costs but should be able to deliver “a slow improvement in performance” as it strengthens its balance sheet, as long as the market remains favorable

“This process is unlikely to provide a catalyst for improvement in the short term, beyond a sense of relief that it is avoiding nasty surprises”

Here is the Deutsche Bank 6% CoCo bond issued in 2014.

dbcocoa

And today it is selling at a discount.

cocoperp.png

A 6% DB perpetual bond from 2014 now has a yield to worst of 7.88%. Now, THAT is getting Italian (banking)!

kevintheoffice