Contingent Convertible Bonds

Contingent convertible bonds (referred to as CoCos) are bonds that convert from debt to common equity automatically if a specific event occurs. This type of bond has been issued by some European banks. Banks must maintain specific levels of equity financing. If a bank’s equity falls below the required level, they must somehow raise more equity financing to comply with regulations. CoCos are often structured so that if the bank’s equity capital falls below a given level, they are automatically converted to common stock. This has the effect of decreasing the bank’s debt liabilities and increasing its equity capital at the same time, which helps the bank to meet its minimum equity requirement.