contingent convertible - Investment & Finance Definition
A mandatory convertible security that allows investors to sell their shares back to the issuer within a certain time period, which may be as short as one year. CoCos are a specific type of mandatory convertible that is created by Merrill Lynch & Company and that has a structural variation that defers the dilution of earnings per share caused by debt being converted into stock shares. CoCo limit when investors can convert their debt to equity, tying that right to price appreciation of the stock. In general, a mandatory convertible is a bond that must be converted into equity by a specific time in the future, often three years. Ratings agencies typically count 80 cents out of each $1 in the mandatory convertible as equity, since the debt will be turned into equity within three years. A mandatory convertible is an attractive alternative for companies that have too much debt, because it helps protect their debt rating. Most companies assume that their stock will remain at its present level or higher and there is little likelihood that investors will want to cash out. Moreover, the conversion price is often set so high that investors are unlikely to ever be able to convert it to cash.