CUCO, when used in a financial context, generally refers to a type of convertible security that offers both income and potential capital appreciation. It stands for “Convertible Unsecured Corporate Obligation.” These obligations are essentially corporate bonds that can be converted into a predetermined number of the issuing company’s common shares. As an example, a CUCO might allow the holder to exchange each \$1,000 face value of the obligation for 50 shares of the company’s stock at a specified time or under certain conditions.
The value proposition of these instruments lies in their hybrid nature. They provide a fixed income stream, similar to traditional bonds, offering a degree of downside protection. Simultaneously, the conversion feature provides exposure to the potential upside of the underlying equity. Historically, such obligations have been attractive to investors seeking a balance between income generation and growth potential. Companies issue them to raise capital, often at a lower interest rate than conventional bonds, as the conversion feature acts as an incentive for investors.
