17 January 2012

On 8 December 2011, the European Banking Authority (EBA) published a formal recommendation on the creation of temporary capital buffers, the objective of which is to create an exceptional and temporary capital buffer to address current market concerns over sovereign risk (the “Stress Capital Requirement”), and which may include very strong newly issued buffer convertible capital securities (“BCCS”) if consistent with the EBA “Buffer Convertible Capital Securities Common Term Sheet”.

One of the key advantages of issuing BCCS to meet the temporary Stress Capital Requirement is that it gives issuers access to the fixed income investor base to raise EBA Core Tier 1 eligible capital, and therefore the possibility of using BCCS to tap supplementary investor sources for Core Tier 1 capital is welcomed.

However, in order for the BCCS to be fit for purpose, as well as achieving the regulatory objectives, the host instrument needs to be sufficiently attractive and marketable.

With marketability being the main influential factor, we conducted a survey on the matter among major market participants. More precisely, we asked a series of questions comparing the market impact of BCCS with a Tier 2 host with otherwise identical BCCS with an Additional Tier 1-style host.

Click the links below to see:

• ICMA's letter to the EBA: Proposals relating to the EBA Termsheet for Buffer Convertible Capital Securities
• the results of ICMA's survey on “Buffer Contingent Capital Securities”