Contingent convertible securities

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Financial Weapons of Mass Destruction
A guide to the tools of our trade.
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From our machine overlords
Here is what, NiGEL, our cheeky little GPT3 chatbot had to say when asked to explain:
Contingent convertible securities (“CoCos”) are subordinated debt securities issued by European financial institutions to meet their regulatory capital requirements. They typically have no defined maturity but bondholders can call for repayment normally after around five years. CoCos have a specific strike price that, if breached, convert the bond into common equity or, in certain cases, can results in the Cocos being written down, or off altogether: “taken out to the woodshed”, in the vernacular, meaning the borrower does not have to repay them. This can create a flurry of ambulance-chasing class-action law suits, especially if it happens unexpectedly, and middle-eastern strategic investors still get paid on their equity.
Disclaimer: NiGEL’s a neural network, he drinks a lot, and he spends too much time on the internet, so if you listen to anything he has to say you only have yourself to blame.

Come to think of it, that is also true of the JC in general.

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Contingent convertible securities
/kənˈtɪnʤənt kənˈvɜːtəbᵊl sɪˈkjʊərətiz/ (also “additional tier 1 capital”) (n.)
A subordinated debt instrument which is not common equity, but is sufficiently like it, in certain moods, that it can be treated as being the same as tier 1 capital (hence its alternative name of “AT1”, or “additional tier 1 capital”).

Cocos have shapeshifting features of being able to turn into common equity if la merde frappe le ventilateur. In fact, that is really what they are for: to create an additional capital cushion for old “Lucky” the sick dog of the financial system when, finally, it gets what has been coming to it for literally years.

Come in two kinds: one which, if the tier one equity trigger is struck, get mixed in with the other common equity holders (these we call call “co-co powder”) and the other which, if struck, get cancelled altogether (“co-co pops”).

The latter caused quite the brouhaha in March 2023 when Credit Suisse’s coco pops popped, even though their common equity holders still got paid (a bit).

This seemed to be thanks to a Swiss federal ordinance, but it did not go down well with the markets, with even the ECB and the Bank of England loudly opining that this was not what was meant to happen.

We have a sense that this psychodrama has not quite yet played out.