This is a new instrument highly promoted by the Basel Committe that can help banks raise funds under special terms in their capital market indicators (mainly Debt / Equity ratios in distress). It works as a convertible Bond (from which it derives its name as CoCoBond, namely Contingent Convertible Bonds). Those bonds should state a range of prices. Their structure consist of a first lower price (Po) under which the bonds will be converted into stock, however this convertion is allowed (at price Po) once a higher price (P1) is reached, otherwise, the bonds are not converted.
The main issues under discussion for the isssuance of these bonds are:
1- Regulatory Capital markets (in accordance to Basel): The ratios of Debt/Equity Book Value are generally determined on a quarterly basis, making this trigger more unattractive to investors, specially under conditions of fast worsening in institutions' financial distress.
2- Use capital markets ratios such as Debt /Market value of Equity. However, it can generate negative incentives to bonds holders, who may pursue short selling of the bonds-related stocks to push the stock prices lower and force selling of those stocks below the exercise price. It may bring more volatility to the capital markets (as these triggers resemble one-if-touch options structures) and are more likely to dilute existing shareholders. A solution for this dilution should grant existing stockholders the right to buy stocks from the bondholders at a lower prince than the exercise price (Call Option Enhanced Reverse Convertible as proposed by Theo Vermaelen at INSEAD)
For offshore banks it can be an useful instrument to guarantee their clients' deposits. Their CoCoBonds can be quoted in offshore exchages such as the ones in Bermuda, which provide a flexible environment for these instruments and are focused on sophisticated investors, relaxing conditions existing in onshore exchanges.
