There are only two ways to finance a company: with equity and with debt. You sell pieces of what you do in return for a piece of the profit. Or you borrow money, hoping you do what you do well enough to pay the money back and have enough left over for profit. One is fish, the other fowl. There is no in-between. Anyone who tells you different is trying to sell you Chicken of the Sea.
Barclays, a large British bank, yesterday sold $1 billion of what’s called “contingent capital,” or what investors call “CoCo.” A CoCo is a bond. It’s borrowing. But if something happens—a contingency—the CoCo turns into something else. What Barclays sold yesterday turns into nothing. It loses its value entirely if the bank’s core Tier 1 capital ratio drops below 7 percent. If you don’t know what a core Tier 1 capital ratio is, that’s OK. No one does, precisely. Each bank has some ability to define it for itself, subject to constant parrying with regulators. So what Barclays sold is not quite debt that, depending on how the bank decides to look at its own books, will at some point turn into something that’s not quite equity.