There's been a lot of talk lately about what a great idea contingent convertibles are. The interest seemed to have been sparked by Lloyd's big issue last month. It sounds ideal on paper: Securities that act like bonds but convert to common stock in tough times would certainly help banks keep their capital ratios strong and debt low if they hit turbulence. But the track record is enough to give one pause.

Business Week notes that these securities have been treated more like common stock as of late. The government suspended some interest payments on Fannie and Freddie hybrids, for example. We've noted that Moody's seems determined to treat them as common stock if times get tough; the assumption has big rating implications. Citigroup and Goldman Sachs were among the banks that stood to have securities downgraded as a result of Moody's methodology change. But the appeal will remain high if issuers will find ways to explicitly describe the triggers that will convert the hybrids to common. That may induce a better response from credit rating agencies and lead to a surge in issuance. 

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