Contingent Convertibles
From Wikipedia, the free encyclopedia
Contingent conversion (co-co) is a feature in many convertible bonds that only allow the investor to convert into stock if the price of the stock is a certain percentage above the conversion price. For example:
XYZ Convertible Bond Stock Price at Issue: $10 Conversion Premium: 30% Contingent Conversion Trigger: 120%
Based on the stock price at issue and the conversion premium, the bond is convertible into stock at $13. However, the co-co feature means that the stock can be converted (at $13) only if the stock trades above $15.60 ($13 x 120%) over a specified period, often 20 out of 30 days before the end of the quarter.
[edit] Historical Context
The co-co feature was often favored by issures because the shares of common stock underlying the convertible security were only required to be included in diluted EPS calculation if the issure's stock traded above the contingent conversion price. In contrast, non-co-co convertible bonds result in an immediate increase in diluted shares outstanding (thereby reducing the EPS number - all else equal). The impact to diluted shares outstanding is calculated using the "as-if-converted" method, which requires the most convervative EPS value be used.
[edit] Regulation
Note that recent changes to GAAP have eliminated the favorable treatment of co-co's, and as a result their popularity with issuers has waned.
