Credit Suisse watches ~$17billion in Tier 1 Contingent Convertible Capital Instruments (CoCo) bonds become worthless. What are Contingent Convertible Capital Instruments (CoCo) bonds? More details inside.
This is starting to come up in corporate media and expect it to make its way here next as more folks are digging into:
https://www.barrons.com/articles/credit-suisse-s-coco-bonds-how-17-bn-disappeared-6283ee5f
https://www.ft.com/content/b5cd8ff0-4c0e-418c-8e4b-dda1d00fa5a7
https://www.marketwatch.com/story/what-are-cocos-and-why-are-credit-suisses-now-worth-zero-634a65e5
https://www.wsj.com/articles/credit-suisse-bond-wipeout-threatens-250-billion-market-10be7d04
Contingent Convertible Capital Instruments (CoCos) AKA Additional Tier 1 (AT1) bonds a $250-$275 billion dollar market thrown into turmoil by Credit Suisse:
First, academia has questions:
https://onlinelibrary.wiley.com/doi/full/10.1111/meca.12392
Contingent convertible capital instruments (CoCos) are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level.
What Are Contingent Convertibles (CoCos)?
Contingent convertibles (CoCos) are debt instruments primarily issued by European financial institutions. Contingent convertibles work in a fashion similar to traditional convertible bonds. They have a specific strike price that, once breached, can convert the bond into equity or stock. The primary investors for CoCos are individual investors in Europe and Asia and private banks.1
CoCos are high-yield, high-risk products popular in European investing. Another name for these investments is an enhanced capital note (ECN). The hybrid debt securities carry specialized options that help the issuing financial institution absorb a capital loss.
In the banking industry, their use helps to shore up a bank's balance sheets by allowing it to convert its debt to stock if specific capital conditions arise. Contingent convertibles were created to help undercapitalized banks and prevent another financial crisis like the 2007-2008 global financial crisis.
The use of CoCos has not been introduced in the U.S. banking industry. Instead, American banks issue preferred shares of equity.
How did they get people to invest in these? YIELD!
9.75%
TLDRS
Wut Mean?
The UBS Credit Suisse deal sees ~$17 billion written down by Credit Suisse due to the mechanics of Contingent Convertible Capital Instruments (CoCo).
This incident highlighted that an isolated disruption in the financial system could cause investors to suddenly fear systemic risks and flee from CoCos, destabilizing the market and exacerbating the original problem but Bologna et al. (2020) suggest that such a contagion effect could be attributed to the lack of experience with this new instrument.
