The Handbook of Hybrid Securities
Extends the same treatment to CoCos and other hybrids.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
De Spiegeleer and Schoutens, both quantitative finance specialists, wrote a technical treatment of securities that combine debt and equity characteristics, with particular attention to contingent convertible bonds.
The reference has not verified the book's detailed contents. What the subject and the 2014 publication date establish is the territory. Contingent convertible bonds were created after the financial crisis as regulatory capital instruments for banks: they pay a coupon like debt but convert into equity or are written down when a specified trigger is breached, typically a capital ratio falling below a threshold or a regulatory determination that the bank is non-viable. The instrument was designed to recapitalise a bank automatically while it remains a going concern, which is what distinguishes it from subordinated debt that absorbs losses only in liquidation.
The analytical problems are specific. Pricing requires modelling both the credit and the equity, since the payoff depends on a trigger driven by regulatory capital rather than by market variables. The trigger is not directly observable and reported capital ratios are updated infrequently. Coupon payments are typically discretionary and cancellable without triggering default. Conversion terms determine whether existing shareholders or bondholders bear the loss, and the incentives differ sharply between write-down and conversion structures.
The volume would also cover conventional convertible bonds, mandatory convertibles and preferred structures.
The instrument's behaviour has since been tested, most consequentially in the 2023 Credit Suisse resolution where the additional tier one instruments were written to zero while shareholders received value, reversing the expected priority. Readers should verify the current regulatory and legal treatment against events since publication.
Key takeaways 7
- Contingent convertible bonds convert to equity or are written down when a capital trigger is breached, while the bank remains a going concern.
- Pricing requires modelling both credit and equity because the payoff depends on a regulatory trigger rather than on a market variable.
- The trigger depends on reported regulatory capital, which is updated infrequently and is not directly observable to the market.
- Coupons on these instruments are typically discretionary and can be cancelled without constituting default.
- Write-down and conversion structures allocate losses differently between bondholders and shareholders, which changes both parties' incentives.
- Hybrid securities exist because regulatory capital definitions create demand for instruments with specific loss-absorbing properties.
- The Credit Suisse resolution wrote these instruments to zero while shareholders received value, which reversed the priority investors assumed.
Who should read it
Practitioners pricing or investing in bank capital instruments who need the technical framework, updated for events since publication.
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Where it sits in the reference 2
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