Authors: Anna Mitsou

Title: Distribution of Contingent Convertibles Bonds by Financial Institutions and Civil Liability Issues

Abstract

Contingent convertible bonds, popularly known as “cocos” are a relatively new form of hybrid securities that are converted to common stock at a loss or are written-down when a trigger event occurs. They were introduced as a response to the financial crisis of years 2007-2011 and as an alternative to rescue packages provided by the public sector to banks in distress in order to inhibit risk transfer from banks’ debt holders to taxpayers. Their main design features are a pre-defined “trigger event”, such as a fall below a certain threshold in the required capital ratio, and a loss absorption mechanism, either in the form of a write-down or conversion into equity, which is activated when the trigger event occurs. Regulators and issuers are pretty keen on the issuance of Coco bonds, since the issuer satisfies regulatory capital requirements under Basel III and CRV IV/CRR and, depending on jurisdiction, may enjoy tax allowances; nevertheless, their constituent characteristics may render Cocos inappropriate for certain categories of investors, namely retail investors.  The aim of this paper is to analyse the rationale in using Cocos to maintain bank safety and to provide an insight on the legal issues concerning Coco distribution to retail investors, by analyzing recent Greek case law on the matter (“case of Convertibles Enhanced Capital Securities by the Bank of Cyprus”).