The contingent convertible capital instruments (CoCos) also known as Additional Tier 1 bonds are hybrid bonds that combines debt and equity elements. Its defining characteristic is that it may be converted into shares if the CET1 capital ratio drops below a specific level.
What is a CoCo?
A contingent convertible bond, also known as CoCo or Additional Tier 1 Capital (AT1) is a hybrid issue that combines debt (yielding interests for the investor) and capital (have the capacity to absorb losses) properties.
Compliance with a series of requirements allows these AT1 issues to be counted as Additional Tier 1 Capital according to applicable regulations (CRD IV). These regulations allow adding 1.5% of additional capital to the mandatory requirements through these issues.
These instruments are perpetual (they have no set maturity date), although the issuer reserves the option to call the bond five years after the bond is issued. Coupon payments corresponding to this type of issues can be cancelled upon request by the issuer (coupon is noncumulative).
The main characteristic of this type of bond is that, if the specific trigger conditions indicated in the issue prospectus are met, they can be converted into shares. The most common trigger conditions include the CET1 (Common Equity Tier 1) ratio dropping below a specific value. Therefore, these issues are exclusively aimed at institutional investors.