Definition
Contingent Convertible Bonds (CoCos)
Contingent convertible bonds, or CoCos, are bank capital instruments that convert to equity or get written down when the bank's capital falls below a set trigger.
CoCos are designed to absorb losses while a bank is a going concern. Indian AT1 bonds are a form of CoCo: they convert to equity or are written off if CET1 drops below a trigger or the RBI invokes the point of non-viability.
Because holders can lose principal precisely when the bank is most stressed, CoCos carry high yields and significant risk. The Yes Bank AT1 write-down in India and the Credit Suisse AT1 wipe-out globally underscored how these instruments can impose sudden, total losses on bondholders.
Related terms
- Common Equity Tier 1 (CET1)Common Equity Tier 1 is the highest-quality bank capital, consisting of paid-up equity shares, share premium and retained earnings, net of regulatory deductions.
- AT1 Bonds (Additional Tier 1)AT1 bonds are perpetual, loss-absorbing instruments that count as Additional Tier 1 capital for banks and can be written down or have coupons skipped under stress.
- Point of Non-Viability (PONV)The Point of Non-Viability is the trigger at which the RBI can require a bank's AT1 and certain Tier 2 instruments to be written down or converted to equity to keep it afloat.
- Subordinated DebtSubordinated debt is borrowing that ranks below senior creditors and depositors in repayment, often issued by banks and NBFCs to raise Tier 2 capital.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.