Coutts, the high-end private bank, has warned its clients against exposing their fortunes to a potential collapse of the high-yield debt market amid growing concerns of a new global credit bubble.
Fears have been raised as investors increase the risk they are taking on the bonds by borrowing further Photo: Alamy
Senior managers at the private bank, whose customers include a who’s who of
British society, are being discreetly advised to reduce their holdings of
high-yield bonds, according to an internal warning seen by The Daily
Telegraph.
Sales of high-yield debt have exploded this year as investors chase returns in
an environment of historically low interest rates and rising inflation. In
both Europe and Asia, high-yield sales have reached all-time highs. In
January alone, Asian companies sold just over $9bn (£6bn) of high-yield
bonds, a year-on-year increase of more than 6,000pc, according to data
provider Dealogic.
Fears have been raised as investors increase the risk they are taking on the
bonds by borrowing further. Coutts’ investment strategy committee has become
concerned at the use by some wealthy individuals of borrowed money to
enhance returns from high-yield investments and is understood to have begun
advising clients to avoid the practice.
“If and when yields rise, the impact of these bonds, magnified with leverage,
could lead to serious losses,” said one investment manager.
The use of borrowed money to enhance returns has become particularly prevalent
in Asia, where local and international private banks have used guarantees of
access to loans to win business.
This practice has led to fears of a new bubble in high-yield debt as investors
buy riskier bonds using more borrowed money.
Among the products causing most concern are CoCos – contingent convertible bonds – that either transform into ordinary shares or are wiped out when a bank’s capital levels fall below a given level.
One of Britain’s leading bond funds has warned against buying CoCos, claiming they are “dreadful” for investors. “By losing all value prior to existing credit and equity investors, this bond is essentially providing insurance to every other investor. In short, investing in these bonds is like being in a reverse lottery where someone gives you one pound every week and then suddenly turns up demanding millions,” said Christine Johnson, manager of Old Mutual’s corporate bond fund.
Lloyds Banking Group and Barclays have both issued CoCos. Barclays issued a $3bn (£2bn), 10-year bond in November that attracted orders of more than $15bn.
But there are concerns that many investors have little appreciation of the risk. “Many buy based on superficial factors – such as the coupon [interest rate] and name rather than the terms and conditions of the bond,” said one senior investment strategist.
Last week, the Bank of England’s Financial Policy Committee said it had identified a £25bn capital shortfall in British banks and it is likely that at least some of this will be raised through new sales of CoCos.
“It appeals to senior management at the banks because it doesn’t dilute equity. And it appeals to regulators because it explicitly takes the pain… In short, good for regulators, good for bondholders but dreadful for those who buy it,” said Ms Johnson.
- Tell us your story. Email money@telegraph.co.uk
Among the products causing most concern are CoCos – contingent convertible bonds – that either transform into ordinary shares or are wiped out when a bank’s capital levels fall below a given level.
One of Britain’s leading bond funds has warned against buying CoCos, claiming they are “dreadful” for investors. “By losing all value prior to existing credit and equity investors, this bond is essentially providing insurance to every other investor. In short, investing in these bonds is like being in a reverse lottery where someone gives you one pound every week and then suddenly turns up demanding millions,” said Christine Johnson, manager of Old Mutual’s corporate bond fund.
Lloyds Banking Group and Barclays have both issued CoCos. Barclays issued a $3bn (£2bn), 10-year bond in November that attracted orders of more than $15bn.
But there are concerns that many investors have little appreciation of the risk. “Many buy based on superficial factors – such as the coupon [interest rate] and name rather than the terms and conditions of the bond,” said one senior investment strategist.
Last week, the Bank of England’s Financial Policy Committee said it had identified a £25bn capital shortfall in British banks and it is likely that at least some of this will be raised through new sales of CoCos.
“It appeals to senior management at the banks because it doesn’t dilute equity. And it appeals to regulators because it explicitly takes the pain… In short, good for regulators, good for bondholders but dreadful for those who buy it,” said Ms Johnson.
- Tell us your story. Email money@telegraph.co.uk
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