OVERVIEW

Contingent Convertible Bonds (CoCo Bonds) are hybrid securities similar to convertible bonds, with the exception that their conversion into equity is based on the occurrence of a specific event. The event, known as the contingency, can be triggered by the equity price reaching a predetermined threshold or the issuer’s capital falling below a specified minimum.

Eagle Accounting does not have a specific processing security type for CoCo Bonds, however, they can be modeled as convertible bonds with the Exchange Offer corporate action used should a contingency event occur. The principal conversion ratio is decided at the time of the contingency event, and the corporate action can be adjusted to reflect the applicable ratio.

REFERENCE DATA

CoCo bonds are modeled using Eagle's core fixed income and equity functionality with two separate security master files (SMFs). Below are specific reference data configurations.

• Processing Security Type: DBIBFD
• Coupon
  • Fixed Rate Security: based on bond terms
  • Floating/Variable Rate Security: 0 (rates must be populated in Variable Rate table)
• Coupon Type Code: Fixed, Floating, or Variable based on bond terms
• Day Count Basis: based on bond terms
• Business Day Convention: based on bond terms
• Payment Frequency = based on bond terms.
• Issue Price = 100
• Maturity Price = 100
• Convertible Indicator = Yes

Underlying Security Information: underlying security details can be entered using the Underlying Information fields on the SMF. Underlying security information is needed at the time of conversion of CoCo Bonds, so the fields become required when Convertible Indicator is set to Yes.

• The equity should be entered as the underlying security for the bond

ENTITY SETUP

Any amortization method (including none) can be used for CoCo Bonds, although it will often be irrelevant because they are purchased at par. If a CoCo Bond is purchased at a price other than par, Eagle’s core fixed income processing will amortize the security to par at maturity based on the entity-level Primary Amortization/Accretion Rule.

TRADE PROCESSING

Buy

Once all reference data has been configured, the Book Trade panel under the Trade tab can be used to process CoCo Bond transactions.

• Trades should be processed like standard bond trades
• A Principal value is calculated based on the Par Value/Current Face and trade Price
• Traded Interest is calculated, if applicable, and factored into the Net Amount
• Amortization Yield is also calculated at trade time, if applicable

CORPORATE ACTION

In order to convert the bond to its underlying equity in Accounting, an Exchange Offer corporate action must be created and processed. The corporate action should be processed on conversion date, using the same underlying security identifiers that were entered on the SMF. Accounting calculates the new position based on the original position values.

There are two options for setting up the corporate action announcement:

• Reference > Corporation Action Announcements > Exchange Offers
• Reference > Corporate Action Viewer > Add Announcement > Exchange Offers

Enter an identifier of the CoCo Bond in either the From Asset ID or From Issue Name field.

• From Post Action Price = market price of the CoCo Bond at time of conversion
• Sweep Date = date when the global corporate action process will pick and execute the corporate action (generally current date)
  • Note: this is a strictly operational data element, as it only relates to global processing; the corporate action will take effect on Ex Date
• Ex Date = conversion date
• Corporate Action Status = Released
• Mandatory/Voluntary Indicator = Mandatory

Enter an identifier of the floating rate bond in either the To Asset ID or To Issue Name field

• To Post Action Price = market price of the underlying equity at time of conversion
• Rate Of Action = number of equity shares received for each unit of the CoCo Bond
• Corporate Action Type = Exchange Offer

The corporate action is triggered using the Global > Global Process Center > Corporate Actions Processing > Merger/Exchange Offer/Assimilation panel.

• Set Corporation Action Begin & End Sweep Date to a range that includes the Sweep Date entered on the announcement

ACCOUNTING

Once a CoCo Bond position is established it will follow core Eagle Accounting processes.

Mature

CoCo Bonds are captured by Eagle’s core maturity process. Maturities are triggered using the Global > Global Process Center > Expirations > Mature panel.

• Set Maturity Processing Date equal to Maturity Date of the CoCo Bond
• To settle the principal and interest cash from maturity, use Global Process Center > Settlements > Contract Cash

VALUATION

CoCo bonds can be valued daily using par-based prices. After conversion, the equity price will be used. Eagle Accounting calculates the security’s value by using the formula below:

• Market value = Par Value/Current Face * Price * Price Multiplier * Quantity Scale

STAR to PACE

The STAR to PACE process will create a single position row for each CoCo Bond in the position_detail table.

• The market_value_income column on the CoCo Bond row will capture the market value plus any accrued interest
• Cash activity will be appropriately signed
• Similar to other instruments, STAR to PACE creates data in position, position_detail, trade, and cash_activity tables

OPERATIONAL REPORTING

CoCo Bonds will appear on all core Eagle reports. The operational reports were specifically designed to support the daily workflow. They are used to quickly identify differences and provide the necessary detailed information in order to resolve any discrepancies that may exist. The reports are primarily driven off of Data Management with data updated by the STAR to PACE Direct events. Eagle recommends following current best practices of using these core queries and building custom result profiles that fit your business needs.

INVESTMENT REPORTING

The STAR to PACE process moves position, cash activity, and trade data to Data Management. This enables users to take advantage of all of the PACE OLAP reporting capabilities:

• Single/multi period lot, aggregate, and position reporting
• Trade activity reporting
• Cash activity reporting
• Exposure reporting with full analytics integration; some data must be augmented to achieve complete exposure reporting

PERFORMANCE

The performance toolkit has full functionality to calculate market value based performance for CoCo Bonds at the contract level. The toolkit process is pre-configured to read data supplied by the STAR to PACE process and calculate performance.

• Total performance of the CoCo Bond is calculated
• Risk analysis and performance attribution analysis features are available to analyze CoCo Bond performance

AUTOMATION

Eagle supports loading CoCo Bond SMFs and trades through standard Message Center streams. The SMF must be loaded prior to the trade (trades will not automatically spawn SMF records). Refer to the Generic Streams and Data Uploaders Reference Guide for more information.