Would you really want to receive your bonus in CoCos?

Rumour has it that BarCap's contemplating CoCo bonuses. Now Credit Suisse is said to be going there too.

But would you really want your bonus paid in contingent convertible bonds?

Actually, probably not.

There are advantages. Chief among them is the fact that most banks are expected to issue CoCos paying coupons of 8-9% a year. You'd be hard pushed to find an equivalent guaranteed return elsewhere.

On the other hand, however, analysts point out that CoCos are replete with disadvantages.

Namely:

1) Wipeout

They'll convert into equity (which could easily be wiped out) once tier one capital falls

below a specified level; at this stage it's not clear what that level will be.

2) Illiquidity

They're not very liquid. Like the equity portion of bonuses, CoCo bonuses will be deferred over 3 years (or more). However, while the market for banking shares is deep and established, the market for CoCos is shallow and uncertain. This means that you could either have problems selling your CoCos, or you could be forced to sell them at a discount to attract a buyer. Either way, you will end up with less cash than if you were paid in equities.

3) Coupon reductions

Even though banks are paying outside investors a yield of 8% on CoCos, they may pay far less to staff. "Banks are going to be aware that they can get away with paying staff far less than the market rate," says one analyst. "8% seems unlikely."

Like them or not, however, the view is that CoCos are going to become an increasingly common method of delivering bonuses. Analysts say that Credit Suisse may struggle to issue its CoCos in time for the 2010 bonus round, but that it will definitely happen for 2011 and that other banks will follow.

"Ideally, I'd like my CHF1m bonus in cash tomorrow," says one Swiss banking analyst. "Failing that, I might take CHF300k of equity a year for three years. Failing that, I'll take CoCos."