It stands for principal write-down; a write down of the principal of a contingent convertible bond (CoCo bond) upon occurrence of a trigger event. In this bond (a contingent convertible, known as principal write-down contingent convertible (CoCo)) the principal is written down (as a loss absorption mechanism, LAM), upon occurrence of a CoCo trigger, either full or partial. Most principal write-down contingent convertibles (PWD CoCos) are embedded with a full writedown feature. However, in specific situations, holders of CoCos would lose a specific percentage (e.g., 75%) of the face value (principal) and receive the remaining percentage in cash.

This loss absorption mechanism is, however, not easy in application as the issuer, that is already in distress, would have to fund a cash payout (of the remainder). With respect to this mechanism, CoCo holders and equity holders have conflicting interests. All else held constant, equity holders prefer PWD CoCos as a better means to avoid dilution and pass on the cost of the issuing bank’s financial distress to CoCo holders.

Upon the occurrence of a trigger event, a principal write-down will occur with an immediate effect, but no later than within one month or such shorter period as may be required by a regulatory body (known as a trigger event write-down date).