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Opinion

CoCo bonds: CoCo nuts, says prof

It is always nice to meet someone who is enthusiastic about what they do. And few come more enthusiastic than Theo Vermaelen, professor of finance at Insead. When he is not teaching MBA and executive programmes, Vermaelen has set himself a challenging task. "I am on a mission to save the world!" he excitedly told a gathering of financiers at a recent meeting on capital innovation and CoCo bonds in London. He plans to do this using his new invention, a new form of contingent capital known as Coerc – the call option enhanced reverse convertible. This essentially avoids the death spiral risk associated with CoCo bonds as they approach their trigger by giving shareholders the option to buy from CoCo holders when the trigger is hit. He says that this will address the risk of market manipulation from short-sellers when the trigger is tripped. Vermaelen is vehemently opposed to capital ratio triggers. "Sometimes the market is right, sometimes it is wrong – but accounting is always wrong!" he declares. For those investors that can be coerc-ed (geddit?) to get behind his new instrument, Vermaelen declares: "Under my Coerc design you will be risk-free – better than a government bond!" Hmmm... perhaps not such a challenging task after all.

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