understanding financial jargon
Contingent Convertible Bond (COCO)
The Contingent Convertible Bond (or Coco bond) is a type of bond which are like normal bonds but in the event that a company begins to fail, the bonds are converted into shares.
This may be particularly relevant to the banking industry, where some regulators think that Coco Bonds may be able to stop a bank from failing. In the banking industry the regulators require banks to hold a certain percentage of capital to remain solvent. If this 'safety fund' falls too low the bank risks failing, but using Coco bonds may help avert this.
For example, if a bank has $50 million of it's own funds (including shareholders funds) and a risk-weighted assets of $200 million (including $20 million of Coco bonds), it's capital ratio is 50/200 or 25%.
If the Coco bonds were converted to shares the capital ration is now 70/180 or 39%, an immediate uplift. However any sudden conversion of contingent convertible bonds to shares may cause a share sell off which would drive the shareholders fund down. This would most likely push the bank back towards breaching capital requirements anyway.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
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