What Are CoCos or AT1s And Why Are They Risky?

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They’re called contingent convertible bonds, or CoCos — and are often described as high-yield investments with a hand grenade attached. An emergency rescue of Credit Suisse by UBS Group AG in March included pulling the pin on $17 billion of CoCos, also known as Additional Tier 1 (AT1) bonds. A legacy of the global financial crisis, they’re the lowest rung of bank debt, producing juicy returns in good times but taking a hit when a bank runs into trouble. While shareholders — often the first domino to fall in such situations — salvaged some value from the takeover engineered by Swiss banking authorities, Credit Suisse’s CoCo holders walked away with nothing. The move reverberated across bond markets and alerted investors to the maze of terms and regulations governing this type of debt.