Rethink for hedge funds as CoCo market turns sour

Convertible arbitrage

Investment bankers are well versed in exploiting gaps in accounting rules. The trouble is, in their quest to book fees, such loopholes can sometimes turn into nooses.

Contingent convertible bonds – commonly referred to as CoCo – have been popular with cash-hungry companies (see figure 1). The additional contingency in such bonds has allowed issuers to avoid taking an immediate hit to their earnings-per-share (EPS) – that is, avoid the accounting practice applied to plain vanilla convertibles.

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