Contingent capital with contingent share repurchase clause☆

Xianwei Lin, Franck Moraux () and Xuezhi Qin
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Xianwei Lin: JUST - Jiangsu University of Science and Technology
Franck Moraux: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique
Xuezhi Qin: Dalian University of Technology

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Abstract: Existing contingent convertible bonds (CoCos) have several drawbacks for investors and issuers. This paper introduces the CCCR, a hybrid security that improves upon CoCos by adding an automatic share repurchase mechanism, requiring the company to repurchase shares if its financial condition worsens after the conversion of contingent debt securities into equity. We develop a structural model based on Leland's framework to analyze a firm's optimal capital structure, which includes equity, CCCR, and a straight debt. The model endogenously determines the CCCR's features, and we derive pricing formulas for the firm's liabilities. To ensure applicability, we derive a condition and corresponding minimum conversion ratio ensuring a one-to-one mapping between equity value and firm asset value. Our analysis of credit spreads, asset substitution, and other key financial metrics shows that, compared to alternative financing options, capital structures incorporating CCCR offer significant advantages for investors while imposing minimal additional costs on issuing firms, establishing this new security as a rational and viable form of contingent capital.

Keywords: Contingent capital; Contingent convertible bonds; Share repurchase clause; Optimal capital structure; Dynamic capital structure (search for similar items in EconPapers)
Date: 2026
Note: View the original document on HAL open archive server: https://hal.science/hal-05769414v1
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Published in Journal of Corporate Finance, 2026, 101, pp.103070. ⟨10.1016/j.jcorpfin.2026.103070⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05769414

DOI: 10.1016/j.jcorpfin.2026.103070

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