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Contingent Convertible (CoCo) Notes: Structuring & Pricing

Contingent Convertible (CoCo) Notes: Structuring & Pricing

Author(s): Jan de Spiegeleer , Wim Schoutens

A CoCo stands for a bond that will be converted into equity as soon as the bank gets into a life threatening situation. As soon as the solvency of the bank drops below acceptable standards, the bonds are converted into equity.

Publication Date: April 2011

Price: £150  


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Contingent convertible notes (CoCo) made a very modest entry into the financial landscape in November 2009, when LLoyds TSB offered the holders of some of its hybrid debt the possibility to swap these holdings into a new bond with CoCo-features.


A CoCo stands for a bond that will be converted into equity as soon as the bank gets into a life threatening situation. As soon as the solvency of the bank drops below acceptable standards, the bonds are converted into equity. This creates a dilution for the existing shareholders, but the solvency of the bank is improved under circumstances in which it would be typically difficult, if not impossible, to go to the capital markets directly. Some regulators continued on the route of Lloyds TSB. They now advocate the use of these bonds as soon as a bank represents too much systemic risk for the banking system.


Some banks are already engineering new CoCo-note types or consider paying out CoCo-bonuses. For regulators, issuing banks, rating agencies, investors and trading desks around the globe. This makes this book a must read for everybody who wants to understand this asset class.

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Book Review

“The book in English-, deals with the structuring and valuation of Contingent Convertible Notes (CoCos). Contingent Convertible Notes are mandatory convertible bonds which automatically convert into shares if the equity base of the issuing bank falls below a certain threshold. Most recently, credit institutions like Credit Suisse or Rabobank have used (CoCos) to generate the required capital – notwithstanding that the legal classification of such hybrid instruments as core capital under the Basel III/ CRD IV-regulations still remains unclear.
 
Legal uncertainty also exists with regard to the legal arrangements. Nevertheless, the authors comment on the actual state of economic issues of these instruments in great detail ( combined with a brief outlook ).
 
In particular, the conditions of the conversion process and the mechanism of the mandatory conversion are examined in great detail. Furthermore, the structure of CoCos is explained in the book, based on descriptive examples in a perfect manner.
 
Thus, it provides an excellent opportunity for the reader to gain a particular insight into the complex matter.
 
The book is also advisable as CoCo-Bonds will remain relevant –at least in the medium term -to the capital market.”

[Dr Simon G. Grieser, translated from Die Bank, 8. September 2011]

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