How Contingent Convertibles (CoCos) Work and the Risks.

A contingent convertible (CoCo) is a type of bond that can be converted into equity if certain conditions are met. For example, a CoCo bond may be automatically converted into equity if the issuer's share price falls below a certain level.

CoCo bonds are often used by banks as a way to raise capital. This is because they offer the potential for higher returns than traditional debt instruments, while also providing some downside protection for investors in the event that the issuer's financial condition deteriorates.

However, CoCo bonds also come with some risks. For example, if the issuer's share price does not rebound and the CoCo bond is converted into equity, investors could see their investment significantly diluted. In addition, there is also the risk that the issuer may not be able to meet the conditions necessary to trigger the conversion, in which case investors would simply be left holding a bond with no upside potential.

What is contingent capital in insurance?

Contingent capital is insurance that pays out if a certain event occurs. The event could be the death of the policyholder, the policyholder becoming disabled, or the policyholder's house being destroyed. If the event does not occur, then the insurance policy does not pay out.

How do convertible notes work?

Convertible notes are a type of debt that can be converted into equity at a later date. The conversion can happen at the discretion of the holder of the note, or it may be mandatory after a certain period of time.

The terms of the conversion are typically negotiated when the note is issued, and will specify the conversion price or ratio. This is the price at which the debt will be converted into equity, and is usually set at a discount to the valuation of the company at the time of conversion.

For example, if a company is valued at $1 million when a convertible note is issued, the conversion price might be set at $0.50 per share. This means that each $1,000 of debt can be converted into 2,000 shares of common stock.

If the company's value increases to $2 million at the time of conversion, the holder of the note will effectively be getting $2 worth of equity for each $1 of debt. This is why convertible notes are often seen as a cheaper way to finance a startup, since the investors are taking on some of the risk of the business.

convertible notes can also be structured in a way that gives the holders certain rights or privileges, such as preference in the event of a sale or IPO.

What is AT1 Coco bonds?

AT1 Coco bonds are a type of convertible note that can be exchanged for common shares at the issuer's discretion. The issuer may choose to convert the notes into shares at any time during the life of the bond, but is not obligated to do so. If the issuer does not convert the notes, they will be repaid at maturity.

AT1 Coco bonds are typically used by issuers who are seeking to raise capital but are not sure if they will need the money immediately. By issuing convertible notes, the issuer can raise money now and then decide later whether to convert the notes into shares or repay them at maturity. This flexibility makes AT1 Coco bonds an attractive option for issuers and investors alike. Do contingent convertible bonds convert automatically? Yes, contingent convertible bonds convert automatically. However, the conditions under which they convert may vary from bond to bond. For example, some bonds may convert automatically if the issuer's stock price reaches a certain level, while others may convert automatically if the issuer's debt-to-equity ratio falls below a certain level.

Are convertible notes the same as convertible bonds?

Convertible notes are a type of debt that can be converted into equity at the discretion of the holder. Convertible bonds are a type of debt that must be converted into equity at a predetermined date. Convertible notes give the holder more flexibility than convertible bonds, but they also come with more risk.