Entry in progress—B.P.
contingent convertible definition - finance
A mandatory convertible security that allows investors to sell their shares back to the issuer within a certain time period, which may be as short as one year. CoCos are a specific type of mandatory convertible that is created by Merrill Lynch & Company and that has a structural variation that defers the dilution of earnings per share caused by debt being converted into stock shares. CoCo limit when investors can convert their debt to equity, tying that right to price appreciation of the stock. In general, a mandatory convertible is a bond that must be converted into equity by a specific time in the future, often three years.
20 November 2000, Investment Dealers’ Digest, “Amid Underwriting Blues, Merrill Sings A Merry Tune in Zero Convert Market”:
...the zero included a contingent conversion that Merrill calls CoCo.
The Wall Street Journal
Contingent Convertible Bonds Are Working Out for Investors
By TOM BARKLEY | Staff Reporter of THE WALL STREET JOURNAL
October 22, 2001
NEW YORK—When companies started selling them last year, contingent convertibles—or “CoCo bonds”—looked to some like a better deal for issuers than investors.
But now, with stock prices trading well below bull-market highs, the tables may have turned.
Convertible bonds are fixed-income securities that are exchangeable into an issuer’s stock. They allow investors to wager on a rise in the share price while collecting a regular coupon payment.
Contingent convertibles are a relatively new variety of the hybrid securities.
The first issue was a $4.5 billion deal in November 2000, by Tyco International Ltd. Since then, they have been sold by a number of other large-cap companies, attracted by 0% debt and the tax and accounting benefits they offer.
Cuckoo for Coco Puffs?
Contingent convertible bonds get a tax-treatment boost from a new IRS revenue ruling. But the window of opportunity may slam shut.
Robert Willens - CFO.com | US
May 22, 2002
Although the issuance of securities has experienced a well-documented decline, one category that has help up well—and has in fact increased—is convertible securities. There are several well-known investment explanations for this divergence. However, the tax law seemingly served to fuel the issuance of a particularly popular variety of convertible—the contingent convertible.
Until recently, it was not entirely clear that the tax benefits envisioned by the issuers of these securities were legitimately claimed. Now, however, with the issuance of Revenue Ruling 2002-31, these intrepid issuers have been entirely vindicated. In fact, the tax benefits thought to be associated with these novel securities are fully available.
Fri Nov 06, 09 04:43 PM
I just read about a new structure Lloyds Bank is apparently willing to place. The call them “Contingent Convertible Bonds” (short Coco Bonds). Those bonds are, unlike classic convertibles, not linked to the share price of an institution but to its core capital. I.e. if the core capital of the issuing institution drops below a certain threshold (in Lloyds case 5% from a current 8.9%) then the bond is converted into common stocks.
Newfangled Bank Capital
Published: November 12, 2009
Contingent capital securities — known as CoCo bonds — have made their debut. The early reviews seem promising.
The securities, a newfangled form of convertible bonds, were sold by the beleaguered Lloyds Banking Group of Britain. Lloyds increased the size of its sale by a quarter, to £7 billion ($11.6 billion).
The warm reception may encourage other banks to sell CoCos, a development that would probably please regulators, since CoCos could cushion banks in the event of another financial crisis.
New York City • Banking/Finance/Insurance • (0) Comments • Thursday, December 10, 2009 • Permalink