Contingent Capital: The Case for COERCs

Christian Wolff, Theo Vermaelen and George Pennacchi
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George Pennacchi: University of Illinois at Urbana Champaign

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts into equity when the market value of equity relative to debt falls below a certain trigger. The conversion price is set significantly below the trigger price and, at the same time, equity holders have the option to buy back the shares from the bondholders at the conversion price. Compared to other forms of contingent capital proposed in the literature, the COERC is less risky in a world where bank assets can experience sudden jumps. Moreover, the structure eliminates concerns about putting the company in a “death spiral” as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses.

Date: 2010
New Economics Papers: this item is included in nep-ban
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Related works:
Journal Article: Contingent Capital: The Case of COERCs (2014)
Working Paper: Contingent Capital: The Case for COERCs (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:10-08

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