Government Capital Injections and Bailout Cocos

So far we have considered write-down-only cocos and cocos which convert into common shares when triggered. The former type of cocos provide for an extreme form of private-sector debt-holder involvement in loss absorption outside bankruptcy known as bail-in. Writing off the cocos debt of a concern that remains in operation subordinates the claims of cocos holders to those of existing shareholders when a contingency event has occurred. Upon conversion, cocos holders lose their entire investment while shareholders gain from the debt relief. The same debt cancellation is also provided by cocos that convert into common stock, but cocos holders do not lose everything because the recovery rate from the common shares cannot (yet) be down to zero outside of bankruptcy when the cocos are accurately triggered. What cocos holders do not lose from conversion, pre-existing shareholders cannot gain. Whether cocos convert into common shares or not does not affect how much the book value of equity is raised by conversion, but only how that elevated book value—and hence ownership and control—are shared between pre-existing shareholders and new shareholders from conversion…