Contingent Convertible Securities

Contingent convertible securities (“CoCos”) are securities issued by a bank that are designed to absorb the bank’s losses during a period of financial stress, thereby improving the bank’s capital position. CoCos absorb losses by converting to equity or having their principal written down (either partially or in full) when a pre-specified trigger event occurs. Absent a trigger event, the securities are hybrid instruments with debt-like characteristics. CoCos may be structured with various types of trigger events.

CoCos were first issued in the aftermath of the 2008 financial crisis. Lloyds Banking Group’s November 2009 offering of enhanced capital notes (ECNs) is generally recognized as the first offering of CoCos. Regulators have encouraged CoCo issuances to reduce the likelihood of taxpayer bailouts such as those that were required during the financial crisis. Depending upon the specific features of the security, CoCos can qualify as Additional Tier 1 (AT1) or Tier 2 (T2) capital under the Basel III international regulatory framework for banks. To qualify as AT1 capital, CoCos must be perpetual instruments with coupon payments that can be deferred or cancelled at the issuer’s discretion.