CoCo Issuance and Recovery Rate Effects: An Empirical Analysis of Contingent Convertible Bond Issuance Effects and their Drivers

Tanja Daniela Brieden

Student thesis: Master thesis


Does the issuance of contingent convertible bonds (CoCos) lower a bank’s probability of default and thus, do CoCos fulfil their stabilizing purpose? Or does the issuance of CoCos solely contribute to the recovery rate of a bank’s debt ranking senior to CoCos without altering the default probability of the issuer? Avdjiev, Bogdanova, Bolton, Jiang and Kartasheva (2017) find that issuers’ senior unsecured CDS spreads decline significantly following a CoCo issue and argue this might be an indicator for risk-reduction effects of CoCos. We critically evaluate this finding because the question what exactly drives this CDS spread decline remains – is it a lower probability of default of the issuer or do CoCo issuances solely contribute to the recovery rate of senior unsecured debt? This thesis conducts an event study on CoCo bond issuances made between 2009 and 2018 and analyses the market reactions on senior unsecured and subordinated CDS spreads around CoCo issuance dates. In addition, we extract information on recovery rate changes following a CoCo issue by analysing the ratio of senior unsecured to subordinated CDS spreads. Intuitively, if the issuance of CoCos results in a reduced probability of default, we should find a reduction in CDS spreads for both levels of seniority. We find that senior unsecured CDS spreads react only insignificantly negative using a sample of 69 CoCo issuances and subordinated CDS spreads react even insignificantly positive using a sample of 54 CoCo issues. For CoCo design features that most likely do not lead to a trigger event prior to the bankruptcy of the issuing bank and for issuers that are less likely to be bailed-out by a government in case of default, the change in the ratio of senior unsecured to subordinated CDS spreads is negative and significant. Those results point to an increase in the recovery rate of senior unsecured debt following a CoCo issue rather than in a bank-wide decrease in the probability of default.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages83
SupervisorsDavid Lando