30 SECOND GUIDE: COCOS

By DAILY MAIL CITY & FINANCE

Updated:

The Daily Mail City team explains these bonds which can turn to equity given the right circumstances

My favourite milky drink

Not quite. ‘Coco’ is short for ‘contingent convertible’ – a special type of company bond, a form of IOU.

Remember that a bond, which is a type of debt, is issued by a company to raise money.

By buying a bond you are lending money. When it ‘matures’ you receive the cash back. In the meantime you get interest, called a ‘coupon’.

Barclays: Issued cocos this week

Barclays: Issued cocos this week

What’s special?

Cocos can turn from a bond into equity, but only in special circumstances – hence they are ‘contingent’ on a specific event.

This trigger for the conversion can differ depending on the terms of the coco. One example would be if a company’s share price went above a certain level, the bondholder would automatically be transferred to become a shareholder.

Why?

When the bond converts, the company no longer has the money as debt, but as capital – this means it can spend it more freely.

For banks, for whom cocos were developed, this means they boost their ‘capital ratios’.

By law they have to hold a certain amount of capital compared to the amount of money they have deposited with them.

Such as?

Barclays this week issued cocos, and pulled in £7.9billion. It’s the first bank to use them since more stringent ‘capital ratio’ requirements were brought in under new rules called Basel III.

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