Addressing Systemic Risk Using Contingent Convertible Debt — A Network Analysis

2019 ◽  
Author(s):  
Aparna Gupta ◽  
Yueliang Lu ◽  
Runzu Wang
Keyword(s):  
Network Analysis ◽  
Systemic Risk ◽  
Convertible Debt ◽  
Contingent Convertible Debt

scholarly journals Contingent Convertible Debt: The Impact on Equity Holders

Risks ◽  
2019 ◽  
Vol 7 (2) ◽  
pp. 47 ◽  
Author(s):  
Delphine Boursicot ◽  
Geneviève Gauthier ◽  
Farhad Pourkalbassi
Keyword(s):  
Capital Structure ◽  
Financial Distress ◽  
Cost Of Debt ◽  
Debt Ratio ◽  
Convertible Debt ◽  
Total Cost ◽  
Contingent Convertible Debt ◽  
The Cost ◽  
The Impact ◽  
The Capital Structure

Contingent Convertible (CoCo) is a hybrid debt issued by banks with a specific feature forcing its conversion to equity in the event of the bank’s financial distress. CoCo carries two major risks: the risk of default, which threatens any type of debt instrument, plus the exclusive risk of mandatory conversion. In this paper, we propose a model to value CoCo debt instruments as a function of the debt ratio. Although the CoCo is a more expensive instrument than traditional debt, its presence in the capital structure lowers the cost of ordinary debt and reduces the total cost of debt. For preliminary equity holders, the presence of CoCo in the bank’s capital structure increases the shareholder’s aggregate value.

From Form to Finance

2017 ◽  
Author(s):  
Dana Brakman Reiser ◽  
Steven A. Dean
Keyword(s):  
Social Enterprise ◽  
Financial Instruments ◽  
Convertible Debt ◽  
Social Entrepreneurs ◽  
Bottom Line ◽  
Social Mission ◽  
Contingent Convertible Debt ◽  
Considerable Period

This chapter describes how social enterprise founders and investors can use financial instruments to credibly signal their double-bottom-line commitments to each other. Its main example is a contingent convertible debt instrument that would constrain both investors and entrepreneurs from unilaterally abandoning social mission in favor of profit. The instrument’s low yield and long term would reassure entrepreneurs by screening in only investors willing to sacrifice profit for social mission for a considerable period. Conversion rights triggered on the sale of founders’ equity would allow investors to trust founders not to sell out. In an IPO or sale before the instrument’s maturity, founders would lose a significant share of any profit to debtholders unless these lenders agreed to its terms. Through this example and others, the chapter shows how social entrepreneurs and impact investors can craft sophisticated financial instruments to overcome the trust deficit that would otherwise keep them apart.

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