What is CoCo Bonds?
- Contingent convertible bond is also known as CoCo bond. It is a supplementary capital tool commonly used by banks, helping banks bolster capital to meet tougher regulation. One of the most frequently seen terms in the international financial regulatory standards set in Basel III is capital adequacy ratio, which requires banks to satisfy certain adequacy indicators.
- When banks issue a CoCo bond, it will decide whether the bond belongs to AT1 or T2 according to the structure of the product, thus replenishing the corresponding AT1 or T2 capital adequacy ratio.
- AT1 CoCo bonds are not subject to expiration time as they are a kind of perpetual bonds. The tenure of T2 CoCo bond is a minimum of five years but both AT1 and T2 CoCo bonds could exercise the call five years after issuance.
- CoCo bonds is structured around a loss absorption mechanism, so it is a product with a higher risk level. On average, CoCo bonds ratings are approximately few notches below those of senior unsecured debt of the same issuer. Some banks may have an A grade for issuer rating, but only BB level for its CoCo bonds rating. Therefore, CoCo bonds offer more attractive yields, and are sought after by many investors because of its higher investment return compared to the common bonds.