Major Credit Rating Agencies' Approaches to Rating Cocos

Cocos can enter into credit ratings in at least two ways. They can be rated essentially like other subordinated debt on the likelihood that they will survive until their first call date (if undated) or maturity (if dated), that interest will be paid in full in a timely manner, and taking into consideration what the recovery rate would be should they be converted into equity rather than just written off. Secondly, as FitchRatings noted in a brief report on “Bank Contingent Capital to Rise,” dated May 28, 2013:Cocos with a high capital ratio trigger are particularly relevant in stress tests and recovery planning as their writeoff or equity conversion, once a pre-determined trigger is breached, is designed to absorb losses on a “going concern” basis before fundamental viability is threatened. In recognition of this, we assign such instruments either 50% or 100% equity credit in our bank capital analysis [that feeds into the firm's rating], broadly depending on coupon flexibility…