Ellipsis AM confirms that there are no "CoCos*"
in its convertible & credit high yield portfolios

The takeover of Credit Suisse by UBS, which was decided Sunday for CHF 3 billion, includes a series of additional measures, including a full write-down of the face value of the acquired bank's Additional Tier 1 loans of nearly CHF 16 billion.

The Swiss Financial Market Supervisory Authority (FINMA) justifies this write-off of subordinated debt by exceptional state support.

As a reminder, Additional Tier 1 (AT1) subordinated debt or Contingent Convertible bonds (CoCos) are a type of conditional mandatory convertible bond, which is converted into shares of a company when the company's equity ratio falls below a certain level. The bondholder then receives shares in the company, usually after the company's share price has fallen sharply.

It is very important to note that CoCos are by nature totally different from traditional convertible bonds. Indeed :

  • It is the convertible bondholder who chooses (or not) to exercise his or her right to convert into shares - usually when the share has appreciated - unlike the mandatory conversion of CoCos, which is at the control of the issuer and/or the regulator - and usually occurs after a share has depreciated.
  • Unlike traditional convertible bonds, whose behaviour is in principle "convex" thanks to the coexistence of a bond floor and a call option on the underlying share, CoCos have limited upside potential (value of bond flows) but unlimited downside risk. Their behaviour is therefore potentially "concave".

For these reasons, we do not have and do not wish to hold this type of security in our convertible bond & credit high yield portfolios (open-end funds, dedicated funds and mandates).

*Cocos : Contingent Convertible bond