Klapton launches a new surety product: CoCo Bonds Investors Guarantee

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Klapton Insurance Company Ltd (“Klapton”) lauched its newest surety product, aimed to protect CoCo Bonds investors.

A contingent convertible bond (CoCo), also known as an enhanced capital note (ECN), is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs. The concept of CoCo has been particularly relevant in the context of crisis management in the banking industry. It has been also emerging as an alternative way for maintaining solvency in the insurance industry.

The CoCo Bond concept was first invented and proposed in the Harvard Law Review in 1991, following the junk bond crisis of the late 1980s. Many years later, others copied the idea as a solution for the banking industry following the Financial Crisis of 2007-08.

While CoCo Bonds gives the banking industry and other issuers an improved opportunity to protect their future capital adequacy and solvency, they present a risk to those investing in them.

Klapton established that sureties can be a valuable instrument when an individual or a firm has invested in CoCo Bonds and introduced a new surety product which protects the investors against two major pre-specified trigger events:

[1] The insolvency of the issuing institution; and
[2] The conversion into equity by the issuer.

Klapton issues a CoCo Bonds Investors Guarantee to the holders of CoCo Bonds (“Beneficiary”) and promises to pay the Beneficiary if the CoCo issuer (“the Issuing Financial Institution” or “IFI”) does not fulfil their Contractual Obligation to the Beneficiary due to insolvency event OR if the IFI decides to convert the CoCo into equity.

In the event the IFI converts the CoCo into equity and the Beneficiary calls the guarantee for cash, the Beneficiary will assign and transfer all their rights in the CoCo or equity to the Surety Company.
Klapton does not accept cover for all issuers of CoCo Bonds and each application will be individually considered.

More information and application forms can be found at www.klaptononline.com.