Tuesday, February 9, 2016

CoCos

Courtesy of Bloomberg QuickTake

Contingent Convertibles

High-Yield Hand Grenades


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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