Contingent Convertibles (CoCos)
or conditional convertible bonds - are a debt that converts into equity in the event of financial problems of the issuer. In other words, if the capital of the issuer begins to decline and reaches a certain limit, then the bond is either converted into equities of the issuer or written off.
By their structure, CoCo bonds consist of the loss absorption mechanism (conversion or write-off) and a trigger that launches this mechanism. A bond can have one or more triggers that are tied to accounting or market indicators, for example, CET1 (Common Equity Tier I), capitalization to company assets, etc.
Here are some examples of Contingent Convertibles: Barclays Bank PLC, 7.625% 21nov2022, USD
, Credit Agricole SA, 8.125% 19sep2033, USD
, Credit Suisse Group AG, 7.5% perp. , USD
Most often the issuers of such bonds are banks and financial institutions, the most typical investors are banks and individual investors in Europe and Asia, which receive higher returns for taking more risk than classic bonds.
The market for such bonds began to grow rapidly after the 2009 global financial crisis, mainly due to the tightening of the requirements of financial regulators to the capital adequacy of banks.