Photographer: Ian Waldie/Bloomberg

Bond Buyers Go Cuckoo for CoCos in Global Stampede for Yield

  • Macquarie gets $12 billion of orders for $750 million note
  • An index for risky bank debt has gained 3.8 percent this year

More than 500 investors stampeded to get hold of some of the riskiest bank bonds for sale this year, in the latest example of how desperate money managers are for securities offering decent income.

Investors put in orders for 16 times the $750 million of bonds that Australia’s Macquarie Group was selling. That enthusiasm allowed the Australian bank to cut the borrowing costs on the high-yielding notes known as additional Tier 1 securities, according to people with knowledge of the matter. Such bonds are part of a group of securities known as contingent convertibles, or CoCos, that have surged 3.8 percent this year -- outstripping the advance for debt sold by junk-rated corporates.

It’s another sign of how fund managers are leaping for anything that pays any sort of yield. The Macquarie bonds, like others in the CoCos group, can suffer losses if a bank runs into trouble, making them risky for investors. It’s a volte-face for bonds that were vilified in the first part of last year over fears that European lenders including Deutsche Bank AG and Italy’s UniCredit SpA might miss coupon payments.

“It’s a massive change from a year ago,” said Tom Kinmonth, a credit strategist at ABN Amro Group NV in Amsterdam. “There’s more risk appetite and regulators are being kinder.”

Yield Allure

Macquarie was willing to pay about 7 percent annual interest on the notes, a figure that fell to 6.125 percent amid strong demand. A spokeswoman for the Australian bank pointed to a statement on the transaction and declined further comment.

Barclays Plc sold 1.25 billion pounds ($1.53 billion) of similar debt this week while notes sold privately by UniCredit in December are quoted at 108 cents on the euro.

The bulk of the demand for Macquarie Group Ltd.’s securities was concentrated among Asian investors, with the order book for the deal already more than 10 times oversubscribed by the time U.S. investors got in on Wednesday, the people said, asking not to be identified as the information isn’t public. From that point, demand ballooned to as much as $12 billion. 

“The Macquarie Bank deal did well given its attractiveness in terms of yield in a generally tight spread and low-yield environment,” said Raymond Lee, a money manager at Kapstream Capital in Sydney. 

Citigroup Inc., JPMorgan Chase & Co., HSBC Holdings Plc and Bank of America Corp. jointly led the sale. The banks had been contacting investors during the past week and pushed up the timeline for the bond sale as it became clear demand for the debt outstripped the amount of money Macquarie was looking to raise, the people said.

Click here for a QuickTake on the risks of contingent convertibles

CoCo bonds sold in the U.S. last year by Australia & New Zealand Banking Group Ltd. were trading at around 108 cents on the dollar on Wednesday to yield 6.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Demand for risk assets rose globally on Wednesday, helped by a speech by President Donald Trump to U.S. legislators late Tuesday. Data showed that U.S. manufacturing expanded last month in the fastest pace in three years, adding to demand in credit markets.

The Macquarie bonds popped to as high as 101.4 cents on the dollar, yielding less than 6 percent in early trading on Thursday, according to pricing data from Trace.

— With assistance by Tom Beardsworth

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