CoCos: A Primer

14 Pages Posted: 16 Sep 2013

See all articles by Stefan Avdjiev

Stefan Avdjiev

Bank for International Settlements (BIS)

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG; Joshua J. Harris Alternative Investment Program

Bilyana Bogdanova

Bank for International Settlements (BIS) - Monetary and Economic Department

Abstract

Contingent convertible capital instruments (CoCos) are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. In this article, we go over the structure of CoCos, trace the evolution of their issuance, and examine their pricing in primary and secondary markets. CoCo issuance is primarily driven by their potential to satisfy regulatory capital requirements. The bulk of the demand for CoCos has come from small investors, while institutional investors have been relatively restrained so far. The spreads of CoCos over other subordinated debt greatly depend on their two main design characteristics – the trigger level and the loss absorption mechanism. CoCo spreads are more correlated with the spreads of other subordinated debt than with CDS spreads and equity prices.

Keywords: CoCo bonds, regulatory capital requirements, pricing, demand and supply

JEL Classification: G12, G21, G28

Suggested Citation

Avdjiev, Stefan and Kartasheva, Anastasia V. and Bogdanova, Bilyana, CoCos: A Primer. BIS Quarterly Review September 2013, Available at SSRN: https://ssrn.com/abstract=2326334 or http://dx.doi.org/10.2139/ssrn.2326334

Stefan Avdjiev

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Anastasia V. Kartasheva (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Joshua J. Harris Alternative Investment Program ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Bilyana Bogdanova

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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