UniCredit partners with Axiom on first global CoCo bond ETF

Mar 19th, 2019 | By | Category: Fixed Income

Italian global banking and financial services company UniCredit has unveiled the first ETF to provide exposure to the global contingent convertible (CoCo) bond market.

Laurent Dupeyron, Managing Director, UniCredit

Laurent Dupeyron, Managing Director, UniCredit.

Launched in partnership with Axiom Alternative Investments, the UC AXI Global CoCo Bonds UCITS ETF (CCNV GY) has been listed on Deutsche Börse Xetra where it trades in euros.

CoCo bonds are a form of hybrid debt primarily issued by financial institutions.

The bonds convert into equity or have their principal written down to absorb the issuer’s capital losses upon the occurrence of certain triggers, such as the issuer falling below a specified liquidity ratio.

Coco bonds generally offer higher yields than investing in senior bank debt and may offer some risk mitigation in regards to rising interest rates.

The fund is linked to the Solactive AXI Liquid Contingent Capital Global Market TR Index – Euro Hedged which includes USD-denominated and EUR-denominated bonds from the Additional Tier 1 (AT1) and Restricted Tier 1 (RT1) capital markets – the exposure to USD-denominated bonds is hedged back into euros.

Other ETFs providing exposure to CoCo bonds have tended to focus on the AT1 market which consists of bonds issued by banking institutions. The less developed RT1 market instead comprises bonds issued by insurance firms. These bonds are similar in structure to their AT1 counterparts: perpetual bonds with minimum five-year non-call periods, non-cumulative fully optional coupons, and the presence of contractual triggers. However, due to differences between banking and insurance firms, AT1 and RT1 bonds tend to differ in what constitutes a trigger precipitating a principal write-down or equity conversion.

The reference index is the largest CoCo index globally by market cap (€141 billion) and the most diverse with a total of 123 bonds. It includes only issuers with an investment grade rating on senior unsecured issues and is currently showing a yield to maturity of 8.4%.

Timo Pfeiffer, Head of Research at Solactive, commented, ”As a bridge between bonds and equity, contingent convertible bonds are an attractive vehicle for investors, giving exposure to the advantages of both financial instruments, while keeping a low bond-like risk profile.”

The ETF comes with a total expense ratio (TER) of 0.65%, and income is accumulated within the fund’s portfolio.

Laurent Dupeyron, Managing Director, UniCredit, commented, “Today’s announcement is a major development for our institutional investor base who can now gain market-weighted exposure to the CoCo universe in an easy and cost-effective manner while still benefiting from a UCITS structure. With this launch, we are proving once again that we can respond flexibly to market developments and the demands of our clients.”

David Benamou, Founder and Chief Investment Officer of Axiom AI, added, “We are delighted to launch the first global CoCo bond ETF in partnership with UniCredit. We see the current market environment as very attractive for a number of reasons.

“With the latest bank stress tests showing capital levels in excess of 3% above the conversion trigger, coupled with the current upgrade momentum for European banks by rating agencies, these developments represent very positive signals for the asset class moving forward.”

There are currently three other CoCo bond ETFs available in Europe, all of which come with a lower TER than the UniCredit fund.

The WisdomTree AT1 CoCo Bond UCITS ETF (CCBO LN) covers CoCo bonds issued by financial institutions from developed European countries. Its TER is 0.50%.

The Invesco AT1 Capital Bond UCITS ETF (AT1 LN) focuses on the US dollar-denominated AT1 bond market, the deepest and most liquid in which European banks issue AT1 bonds. It has the cheapest TER at 0.39%.

Finally, the Market Access Markit iBoxx EUR Contingent Convertible Liquid Developed Market AT1 Index UCITS ETF (M9AT LN) provides exposure to euro-denominated AT1 bonds. Its TER is 0.48%.

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