AXA to repay CoCo bond, but investors worry others may not follow

By Abhinav Ramnarayan and Maya Nikolaeva

LONDON/PARIS (Reuters) - Axa <AXAF.PA> is the latest European financial firm to say it will redeem some of its "Co-Co" bonds, providing some reassurance to investors worried this debt class could be particularly vulnerable to companies' need to conserve cash.

The economic fallout from the coronavirus pandemic has put a spotlight on contingent convertible bonds (CoCo), which are the riskiest debt banks can issue and are designed to act as a protective layer for them in times of trouble.

They are perpetual in nature, but banks tend to repay them at the first opportunity to show their financial strength.

Many investors fear that could now change, or that coupons might not get paid, as firms prepare for difficult times ahead.

Soothing some worries, French insurer AXA said on Wednesday it would redeem the 1.3 billion euros ($1.4 billion) subordinated notes issued on 16 April 2010, following similar moves by Dutch lender ING and Sweden's Swedbank in recent weeks.

Britain's Lloyds Bank and France's Credit Agricole this week launched tenders to buy back CoCo bonds as well.

"AXA have said in the past they want to reduce debt, so it makes sense to repay this bond and reduce leverage," said Filippo Alloatti, a credit analyst at Federated Hermes.

"But most of the Additional Tier 1 (AT1) debt coming up for a call in the second half of the year will not be called in my view."

Other banks who have AT1 bonds - the most common type of CoCos - that will become redeemable this year include the likes of Julius Baer, Bank of Ireland, Lloyds Bank and Cooperative Bank, according to Axiom Alternative Investments records.

"Some banks will be keen to show they are strong and will try to call, like SEB or ING did recently ... it is hard to assess, but the market is currently pricing as if no one will call by the end of the year," said Jerome Legras, managing partner at Axiom.

Regulatory pressure will also play a role, with some expecting authorities to urge banks not to hand over huge sums of cash to bondholders when they don't need to.

New Zealand’s central bank ordered banks on Thursday to stop paying dividends or redeeming capital notes given widespread economic uncertainty caused by the coronavirus pandemic.

Earlier this year, Deutsche Bank said it would not exercise an option to redeem $1.25 billion of bonds, closely followed by a similar decision by fellow German lender Aareal Bank.

(Reporting by Abhinav Ramnarayan and Maya Nikolaeva; Editing by Rachel Armstrong and Mark Potter)