Banks rush to issue CoCo bonds

Pressed by global regulatory standards on capital reserves, major Korean banking groups are gearing up to issue contingent convertible bonds, or CoCo bonds, to replace subordinated bonds.

For this, most financial companies revised their articles of association or are planning to do so in their upcoming stockholders’ meetings.

According to the Financial Supervisory Service’s electronic disclosure system last Wednesday, Shinhan Financial Group issued 300 billion won ($271 million) of CoCo bonds to raise funds for its flagship Shinhan Bank.

“We decided to issue CoCo bonds to increase our equity capital ratio as defined by the Bank for International Settlements, and for this we recently revised our articles of association,” said a Shinhan official.

Bonds are usually excluded from the issuer bank’s capital adequacy, which measures whether banks have enough liquid capital to cover potential losses. However, CoCo bonds are automatically converted into equity when the bank’s capital adequacy ratio falls below the minimum level. For this reason, they are considered equity capital under the Basel III rules.

Basel III, a global standard on capital adequacy, has been effective in Korea since December 2013. It places higher requirements on banks than the previous standards.

Under the current capital market law, only listed companies are explicitly allowed to issue CoCo bonds. Financial authorities, however, gave their authoritative interpretation last year that unlisted companies such as Shinhan Bank may qualify for the issuance by including the corresponding article in their internal regulations.

Hana Financial Group, too, is expected to revise its regulations in its regular shareholders meeting Wednesday, though it has no immediate plans to issue CoCo bonds for the time being, according to officials.

The state-run Industrial Bank of Korea issued 400 billion won worth of CoCo bonds earlier this month, in an effort to secure equity capital and finance small business loans.

“The issuance of CoCo bonds will boost the financial soundness of financial groups, as long as the market demand keeps up with supply,” said an FSS official.

By Bae Hyun-jung (tellme@heraldcorp.com)