0
Add funds
Fund 1
Fund 2
Fund 3
Fund 4
TOOLS
The Morningstar Fund Compare tool quickly evaluates different funds against one another. In addition to Nuveen funds, add any MF, CEF or ETF available from Morningstar. Important information and disclosures are included after you click Generate Report. Please ensure to enable pop-ups in your browser.
The Morningstar Portfolio Review tool compares and analyzes your portfolio holdings. In addition to Nuveen funds, add any MF, CEF or ETF available from Morningstar. Important information and disclosures are included after you click Generate Report. Please ensure to enable pop-ups in your browser.
Tools are currently unavailable for use on mobile. Please visit the desktop site.
fund compare tool image
Fund Compare
Quickly evaluate different MFs, CEFs and ETFs against one another
portfolio review tool image
Portfolio Review
Generate a detailed analysis of your portfolio holdings including MFs, CEFs and ETFs
plan profit calculator image
Plan Profit (k)alculator
A plan profitability analysis may reveal a more accurate business financial picture
Image of Municipal bond investing ladder tool
Municipal Bond Ladder Tool
Learn how a laddered portfolio may perform in rising rate environments
Powered by Morning star
Which type of investor are you?
Income Investing

Understanding contingent capital securities (CoCos)

bridge design

Contingent capital securities, sometimes called contingent convertibles (CoCos), have evolved from niche status to become a well-developed segment of the global fixed income markets. Strong issuer credit fundamentals, attractive income and solid historical returns have resulted in broad adoption of the asset class. Liquidity has increased over the years and the CoCo market has grown to near its terminal size (or maximum required capital amount for existing banks). Today, the CoCo market has over 250 billion in face value of securities outstanding, representing over 100 different issuers and spanning multiple currencies. In the pages that follow, we provide an overview and analysis of the asset class, as well as our insights on the important role CoCos can play in fixed income portfolios.

What are CoCos?

CoCos are hybrid securities created by regulators after the 2007-08 global financial crisis (GFC) as a way to reduce the likelihood of government-orchestrated bailouts. Issued primarily by non-U.S. banks, CoCos are designed to automatically absorb losses, thereby helping the issuing bank satisfy Additional Tier 1 (AT1) and Tier 2 (T2) regulatory capital requirements.

Today, European-domiciled issuers (mostly banks but also a small number of insurance companies) make up almost 80% of the outstanding CoCo market. Insurance companies may use these securities for capital purposes or to help manage their credit ratings.

But why are CoCos “contingent”? Because of a feature that automatically imposes a loss on the investor should an issuer’s capital fall below a predetermined threshold — typically 7% of its total risk-weighted assets in a “high trigger” structure and 5.125% in a “low trigger” structure. When this occurs, depending on the structure, there are three possible outcomes:

Currently, minimum regulatory capital requirements for European banks are well above the high- and low-trigger CoCo thresholds. And most banks hold capital far in excess of the required minimum level.

In the U.S., banks issue preferred stock rather than CoCos to fulfill their AT1 capital requirement. The main difference between a preferred stock and an AT1 CoCo, besides the issuer’s likely geography, is that only the CoCo has the contingency feature described above. In fact, because CoCos and preferred stock play nearly identical roles and rank similarly within an issuer’s capital structure — i.e., lower than senior debt but higher than common equity — CoCos are commonly held in strategies that invest in preferred stocks.

Learn more about how CoCos work

Related articles
Municipal Bonds Municipal market offers better value
Municipals underperformed Treasury bonds in the third quarter for the first time since their recovery began in spring 2020.
Weekly Fixed Income Commentary Treasury yields rise on disappointing jobs data and delayed debt ceiling
U.S. Treasury yields rose again last week, with 10-year yields up to their highest levels in more than four months.
Income Investing Fixed income perspective: preferred securities
Preferred securities can offer higher income potential compared to other fixed income sectors.

You are about to access our website for visitors outside of the United States.

You are about to access our website for Nuveen Global Cities REIT

You are leaving the Nuveen website.

You are leaving the Nuveen website and going to the website of the MI 529 Advisor Plan, distributed by Nuveen Securities, LLC.

The Nuveen website for institutional investors is available for you.

You are about to access our website for visitors outside of the United States.

Contact us
Contact us
Back to Top