CoCos Coming of Age

CoCos Coming of Age 2

Davis Polk – MONEY HANDBOOKS 56Cocos: Coming of age? by Jeffrey M. Oakes and Connie I. Milonakis, Davis Polk & Wardwell London LLP1

Background CoCos are capital instruments (Tier 2) or perpetual instruments (AT1) which, upon the occurrence of a trigger event, convert to equity, or the principal amount is written down (either on a permanent or temporary basis). Depending on the trigger event, write-down or conversion will occur at different points in time, giving rise to two principal categories of CoCos: a going concern or high trigger CoCo, which are intended to prevent an institution from entering into an official administrative or judicial resolution proceeding; and a gone concern CoCo which may be triggered either before or during an official resolution proceeding, at the point of non-viability (PONV).

CRD IV became effective January 1, 2014. As part of its Regulatory Technical Standards on Own Funds (RTS), the European Banking Authority (EBA) has provided guidance on, among other items, the CRD IV AT1 capital requirements. The RTS for AT1 capital addresses the form and nature of incentives to redeem, the conversion or write-down of the principal amount and features of instruments that could hinder recapitalisation. Specifically, AT1 capital must have the following features: perpetual maturity, discretionary, cancellable and non-cumulative coupons and a trigger for write-down or conversion when the issuer breaches a 5.125% common equity tier 1 ratio (CET1 ratio).

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