What is a Contingent Convertible Bond?

The bond with a split personality

The Basics

Meet the contingent convertible bond, or CoCo. Despite the cute nickname, don’t confuse it with the warm chocolatey drink you top with marshmallows. Instead, it’s a bond with a party trick: if the issuing bank runs into serious financial trouble, the bond can suddenly transform into shares or disappear altogether.

In good times, CoCos act like normal bonds, paying a steady coupon. But if the bank’s finances wobble, the bond doesn’t just sulk – it transforms, forcing investors to take losses so that taxpayers don’t have to.

Why They Exist

After the 2008 financial crisis, governments were tired of footing the bill for collapsing banks. Regulators wanted banks to be able to rescue themselves, and CoCos became one of the tools.

They sit somewhere between shares (which absorb losses first) and plain bonds (which are meant to be repaid in full). In other words, they’re designed to soak up some of the damage when things go wrong – a built-in buffer in the capital structure.

The Rulebook

In the UK and EU, CoCos count as Additional Tier 1 (AT1) capital – the regulatory safety net. To qualify, they need to follow some strict conditions:

• Perpetual – no fixed end date.
• Subordinated – low down the pecking order if the bank fails.
• Discretionary coupons – the bank can cancel payments, and you don’t get them back later.
• Loss absorption – either by converting into shares or by being written down.

On top of that, the Banking Act 2009 gives the Bank of England power to step in and “bail in” AT1 bonds if a bank is at the point of failure. Regulators aren’t just referees; they can blow the whistle and change the game.

When Do They Flip?

Every CoCo has a trigger – the line in the sand where it stops being a bond:

1. Numerical trigger: If the bank’s capital ratio (a measure of financial strength) drops below a set level – often 5.125% – conversion or write-down happens automatically.
2. Regulatory trigger: Even if the numbers look fine, regulators can still act if they decide the bank is “non-viable.”

Either way, the result is the same: bondholders take the hit before insolvency.

Why Banks Like Them

Banks need capital to satisfy regulators but issuing new shares is costly and unpopular with existing investors. CoCos offer a neat compromise:

• They count as capital under the rules.
• They let banks pay attractive coupons in good times.
• They provide a safety valve in crises without forcing banks to raise emergency equity.

Why Investors Buy Them

CoCos often pay more than other bank bonds, which is part of the appeal. But those higher coupons come with risks:

• Payments can be cancelled without warning.
• Investments can be converted into shares or written off entirely.
• AT1 holders rank below most other creditors in a crisis.

The Credit Suisse saga in 2023 drove the point home: Swiss regulators wiped out CHF 16 billion of AT1 bonds while shareholders still received some value. The outcome was perfectly legal under Swiss law, but a stark reminder that the governing law matters just as much as the bond itself.

Who Issues Them?

CoCos are not niche. Big names like HSBC, Santander, and Lloyds Banking Group have all issued them in the billions. They’re now a standard feature of European bank funding.

The Last Word

CoCos are bonds with a split personality – steady income in calm markets, sudden shapeshifters in a storm. They exist to protect taxpayers by shifting losses to investors instead.

For would-be investors, the details make all the difference: where the bonds sit in the pecking order, how the triggers work, and which country’s laws apply. Get those right, and CoCos can be rewarding.  Get them wrong, and you may find your investment has turned into the financial equivalent of Cinderella’s carriage at midnight – suddenly a pumpkin.