Contingent Convertible Bonds

CONTINGENT

CONVERTIBLE

BOND(CoCo)

Group-5

(1) Abhinav Gupta- 14A2HP404

(2) Kaustubh Datta-14A1HP044

(3) Akash Verma- 14A2HP441

(4) Shivank Sharma- 14A1HP061

(5) Gaurav Gupta- 14A1HP006

7/22/2015

Contingent convertible bond or also known as CoCo are a form of hybrid instrument which have the

element of both debt and equity and was first issued in the UK in 2006. They are issued mostly in Europe,

USA, and China. CoCo bonds unlike a convertible bond get converted into equity or the principal is

written down on the basis of contingent of a specific event. CoCo is issued by the banks with the tenure

of around 5-10 years or can be even perpetual with a call date of 5-10 years. The purpose of the bond is to

keep the Capital consisting of Tier-1 Capital and Tier-2 Capital defined, by regulators along with the

equity during crisis situation. The Tier-1 Capital is the first resort for the banks during the time of the

crisis. It comprises of Capital which is kept at a fixed and prescribed level along with the reserves. If the

Tier-1 Capital goes below the prescribed level the banks come under huge pressure to bring it back to the

original level. That is where CoCo comes into the picture; it usually has a predetermined trigger or

triggers in form Tier-1 Capital level or Tier-2 Capital. The moment Capital falls below the trigger level,

CoCo automatically get converted from a Debt instrument to an Equity instrument making the holder of

the instrument an equity holder or the principal is written down to pump the capital required to bring the

capital to its original and prescribed level.

The big advantage for banks to issue CoCo instead of raising debt is that it is a ready and a cheaper source

to raise regulatory capital. Compared to preference stock the CoCo doesn’t get included in diluted EPS

until it gets triggered and gets converted into equity. CoCo also provides an additional layer of capital to

the creditors and supports a lower...