Timing is everything as European banks ride the CoCos revival

* Low interest rates have driven feverish demand for CoCobonds

* Cost of issuing CoCos has dropped to lowest levels thisyear

* Sweet spot of opportunity remains extremely fragile

By Lawrence White

LONDON, Sept 13 (Reuters) - European banks are playing anerve-jangling waiting game in an effort to reap maximum rewardsfrom issuing billions of dollars of so-called CoCo bonds in afrenzied market revival that could evaporate in a heartbeat.

The yields banks need to pay on contingent convertible bondsissued to bolster lenders' capital reserves have been fallingsteadily as demand has soared, largely from wealthy Asianinvestors, but this sweet spot of opportunity is lookingincreasingly fragile.

Barclays, Royal Bank of Scotland, StandardChartered and UBS are among banks that haveissued Additional Tier 1 CoCos in recent weeks and investorsexpect 50 billion euros more to come from lenders including HSBC and BNP Paribas.

Being among the last to issue could prove prudent becausethe ravenous demand has driven the cost of issuing the debt tothe lowest levels in more than eight months and the last bank toissue is broadly expected to achieve the best price.

RBS and Barclays issued their bonds in August at yields of8.625 percent and 7.875 percent respectively, while DBS Grouplater priced a $750 million bond at a 3.6 percent, the world'slowest coupon for a U.S. dollar Additional Tier 1 offering.

But as Federal Reserve governors in the United States clashover the merits of an interest rate rise this month and marketswobble over economic prospects, banks holding out for theabsolute minimum leave themselves at the mercy of theboom-and-bust nature of investor appetite for CoCos.

ASIAN DEMAND

Bankers said the bonds are particularly attractive towealthy individual investors in Asia, who buy the bonds throughtheir private bank accounts but are quick to abandon the assetclass when the market environment for debt changes, exacerbatingdrops in the value of the bonds.

Asian buyers accounted for the second-largest allocations ofBarclays' recent CoCo issue, taking 24 percent compared with 15percent for investors in the European Union.

"The Asian private bank bid can be fickle, they buy onleverage and are quick to dump it if things look bad so if [aCoCo bond] drops two points, it's probably going to drop 10,"said one European banker who sells the bonds.

The dollar price of the Bank of America Contingent CapitalIndex, a barometer of the value of the bonds in the secondarymarket, reached a year-to-date high of 100.9 on Sept. 9, up from88 in February.

Appetite for the bonds, which offer investors juicy returnsin exchange for the risk that the bond stops paying out andconverts to equity when a bank runs into trouble, had collapsedin February amid concerns that Germany's Deutsche Bank might fail to make some payments on its debts.

"Demand comes and goes, from famine to feast and back tofamine," said Philippe Bodereau, managing director at bondinvesting giant PIMCO.

The market for CoCos remains vulnerable to shocks, bankerswho sell them said, with a single mispriced deal or freshconcerns about regulatory treatment of the bonds capable ofsparking a sell-off.

RISK AND REWARD

"Investors in February were concerned about the uncertaintyas to the point at which coupon payments were going to besuspended, so the market shut down," said Simon Ainsworth, asenior vice president at ratings agency Moody's.

But the attraction for the more intrepid investor is plainto see. The RBS bonds issued in August offered regular couponpayments in excess of 8 percent at a time when ECB rate cutshave sent many European corporate bonds to zero or even negativeyields.

Standard Chartered took advantage of its strong namerecognition in Asia to target a slice of its deal specificallyat private banks in the region through a so-called Reg Soffering, IFR magazine reported.

Barclays sold its entire $1.5 billion issue on Aug. 23 underthe same Reg S rules that exclude U.S. investors, banking ondemand from Asia, sources close to the transaction said.

PIMCO's Bodereau said that a further 50 billion euros ofCoCos could be in the mix over the next two years as banksincluding HSBC, Barclays, Rabobank, BNP Paribas andSantander seek to raise the 1.5 percent of additionalTier 1 capital required by regulators.

The trick is to do so as late as possible but before thewindow slams shut, as it did in February.

"If a bank is unable to fill up its Alternative Tier 1 bucket, it would have to make up the shortfall with commonequity, which could be more costly," said Moody's analystAinsworth.

(Editing by Sinead Cruise and David Goodman)