CoCo Bonds

Contingent convertible or CoCo bonds refer to financial instruments that are hybrid in nature, having characteristics of both debt and equity. CoCos have become a popular source of financing for financial institutions post the global financial crisis of 2008. CoCo bonds are perpetual securities that pay a fixed coupon till a fixed date, after which the coupon is reset to (typically) a fixed margin over an index. The coupon reset date is usually also the CoCo bond's first call date. Proceeds from issuance of CoCo bonds count towards Additional Tier 1 (AT1) capital of banks, which is why these instruments are also known as AT1s. In banks' capital structure, these instruments rank lower to secured debt but above common stock. CoCo bonds typically have a covenant wherein the bonds can be converted into equity on occurrence of a trigger event, which can be mechanical or voluntary in nature. This is why CoCos are said to have loss-absorbing mechanism.

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