Known as “contingent convertible bonds”, or “coco bonds” for short, they are bonds which convert automatically from debt to equity upon a specific trigger event – for instance, if an institution is faced with insolvency or if its tier 1 capital ratio drops below a certain threshold. In such cases, coco bonds increase the bank’s capital buffer.
This new type of bond is attractive to credit institutions for several reasons. One is that, under certain conditions, coco bonds are recognised by supervisors as capital. These conditions hinge on the category to which the capital is to be assigned and reflect, for instance, subordinated status and long-term availability of the capital.