Courtesy of Bloomberg QuickTake
It’s a high-yield investment with a hand grenade attached. A security
carried gingerly with the hope that it won’t explode, leaving investors
in a hole. Welcome to a class of securities that’s all the rage in
Europe: contingent convertibles,
also known as CoCo bonds. A cross between a bond and a stock, a new
type of CoCo is helping banks bolster capital to meet tougher regulation
designed to prevent a repeat of the taxpayer bailouts of the financial crisis.
Many investors are skeptical that the extra yield they offer really
reflects the dangers of a blowup – no one really knows how bad the
fallout would be because the trigger has never been pulled. While CoCos
are supposed to make financial markets safer, there’s a question about whether regulators may have unwittingly created new and untested risks.
Link to the full article
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