'Contingent Convertibles' The World of CoCos - February 2014
Introduction
A Contingent Convertible (CoCo) bond is a debt instrument that converts into equity or writes down as soon as the banks gets into a life threatening situation. Conversion/write down happens via a predefined trigger mechanism: e.g. Common Equity Tier-1 (CET1) falling below 7% and is often accompanied with a regulatory trigger.
For CoCos with a conversion feature, this creates dilution for existing shareholders, but protects potentially taxpayers.