Definition of cocos

Contingent convertibles, also known as CoCo bonds, Cocos or contingent convertible notes, are slightly different to regular convertible bonds in that the likelihood of the bonds converting to equity is "contingent" on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.

They carry a distinct accounting advantage as unlike other kinds of convertible bonds, they do not have to be included in a company's diluted earnings per share until the bonds are eligible for conversion. [1]

It is also a form of capital that regulators hope could help buttress a bank’s finances in times of stress.

CoCos are different to existing hybrids because they are designed to convert into shares if a pre-set trigger is breached in order to provide a shock boost to capital levels and reassure investors more generally.

Hybrids, including CoCos, contain features of both debt and equity. They are intended to act as a cushion between senior bondholders and shareholders, who will suffer first if capital is lost. The bonds usually allow a bank to either hold on to the capital past the first repayment date, or to skip paying interest coupons on the notes.

Example
In the case of Lloyds bank, the trigger is if its core tier one capital ratio falls below 5 per cent. Conversion of its CoCos would push the ratio above 6.5 per cent. [2]

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Interactive graphic: Contingent convertible bonds explained

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