Magazine article Global Finance

Accounting Proposal Hits 'CoCo' Bonds

Magazine article Global Finance

Accounting Proposal Hits 'CoCo' Bonds

Article excerpt


Proposed new accounting rules have put the damper on the issuance of a popular type of convertible corporate bond in the US market.

The Financial Accounting Standards Board wants companies to treat so-called contingent convertible bonds, known as CoCo bonds, the same way they account for regular convertible bonds. This would make the securities much less attractive to companies because the issuance of CoCos would reduce reported earnings.

General Motors announced in August that it would use cash instead of stock to pay clown about $8 billion of CoCos to escape the dilution of earnings that would otherwise result from the accounting-rule change, which could go into effect later this year.

GM, the largest issuer of such bonds, says it would not have issued them in the first place if it had known that the rule change was coming.

The automaker estimated that its earnings would be reduced by $1 per share, or 15% of its expected total for the year, by the new accounting rules.

CoCo bonds are convertible into stock only after the price of the underlying shares rises sharply, sometimes as much as 30%. The bonds do not count as part of the diluted-share total until the stock price rises to this level.

The proposed FASB rule, which is open for comment until September 3, would require that CoCos be included in diluted earnings per share computations regardless of whether the market price trigger has been met.

Issuance of convertible bonds has dried up since the proposed ruling was announced, but expectations of rising interest rates and a slumping stock market also are partly to blame for the lack of interest in convertible issues. …

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