Contingent convertibles, commonly known as CoCos, have surged back into the spotlight in 2025. As Australian banks and regulators respond to global financial pressures, these hybrid securities are carving a distinct niche in the local capital markets. But what are CoCos, and should Australian investors care?
What Are Contingent Convertibles (CoCos)?
CoCos are a special breed of bond issued by banks. Unlike traditional bonds, they are designed to absorb losses when a bank’s capital falls below a certain threshold. When triggered, CoCos convert into equity (shares) or are written down, protecting the bank from collapse but exposing investors to higher risk.
- Trigger event: Usually based on a bank’s capital ratio falling below a predetermined level.
- Conversion mechanism: Bond converts to equity, or the principal is reduced or wiped out.
- Yield: Typically higher than regular bank bonds, reflecting their riskier nature.
Globally, CoCos gained attention after the 2008 financial crisis as regulators sought tools to prevent taxpayer-funded bailouts. In 2025, their relevance is growing in Australia as APRA and other regulators tighten capital requirements for banks in response to global volatility and lessons from recent banking crises in the US and Europe.
Why Are CoCos in the News in 2025?
This year, the Australian Prudential Regulation Authority (APRA) announced updates to its capital adequacy framework, aligning with Basel IV standards. This has encouraged major Australian banks to consider issuing more CoCos to meet the new ‘Total Loss-Absorbing Capacity’ (TLAC) requirements.
- Regulatory change: APRA’s 2025 update increases pressure on banks to bolster capital buffers, making CoCos an attractive option.
- Market dynamics: With global interest rates remaining volatile and investors seeking yield, CoCos are filling a gap between traditional bonds and equities.
- Case in point: In February 2025, one of Australia’s Big Four banks launched a landmark $2 billion CoCo issue—the largest in the country to date—underscoring the instrument’s growing importance.
These developments are reshaping how banks manage risk and how sophisticated investors approach fixed income allocations. However, the unique features of CoCos mean that their risks are not always well understood.
The Risks and Rewards for Australian Investors
CoCos offer enticing yields, but their risk profile is closer to equities than to traditional bonds. Here’s what investors need to consider in 2025:
- Trigger risk: If the issuing bank’s capital falls sharply, CoCos can be forcibly converted to shares (often at an unfavourable price) or written down, resulting in potential capital loss.
- Market volatility: CoCos can be highly sensitive to market sentiment and banking sector health, leading to price swings far greater than regular bonds.
- Regulatory uncertainty: As APRA and global regulators refine frameworks, the precise treatment of CoCos may change, impacting their value and behaviour.
- Liquidity: The Australian CoCo market is still developing, so trading can be thin compared to more established instruments.
Despite these risks, CoCos can provide strong income and diversification for experienced investors comfortable with complex financial products. Some managed funds and ETFs are starting to include CoCos as part of their high-yield strategies, but retail investors should be wary of the potential for sudden losses if a trigger event occurs.
CoCos and the Future of Australian Banking
As Australia’s banks adapt to the new regulatory landscape, CoCos are set to play a bigger role in their capital structures. For investors, this means more opportunities—but also more decisions about risk.
Looking ahead, the expansion of the CoCo market may help Australian banks weather future shocks without resorting to government bailouts. However, the complexity of these instruments demands careful analysis, especially as global markets remain unsettled in 2025.
