 Contingent convertible bonds: Optimal call strategy and the impact of refinancingChristian Koziol and Philipp Roßmann Journal of Corporate Finance, 2022, vol. 77, issue C Abstract: In this paper, we analyze if banks financed with contingent convertible bonds (CoCos) can rely on the classical (CoCo value minimizing) call strategy. Due to further debt positions outstanding, we can show that the optimal (equity value maximizing) call strategy can sharply differ from the simple classical approach. A crucial driver of the optimal call decision is the refinancing assumption of the call price, which determines whether an equal, an early or a late call occurs. In an empirical study comprising 79 European CoCos, we find that the critical stock price triggering a call deviates (on average) by 56.49% from the classical case, which carries over to a CoCo price deviation equal to 8.73%. Our results reveal that the classical call strategy is only justifiable in the special cases of equity injection or junior debt refinancing for a CoCo with a low face value and a late call. Otherwise, the optimal call strategy significantly differs from the classical version and requires knowledge of the particular refinancing assumption. Keywords: Contingent convertible bond; Optimal call strategy; Refinancing; Call decision; Asset sale; Equity injection; Senior debt; Junior debt (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:77:y:2022:i:c:s0929119922001201 DOI: 10.1016/j.jcorpfin.2022.102277 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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