Under post financial crisis regulations meant to shield European taxpayers from being on the hook for bank bailouts, European lenders have had to boost capital levels. Many have done so, using contingent convertible bonds as a more attractive alternative to diluting stockholders by selling new shares. If a bank’s capital cushion gets too thin, banks are forced to make cuts to dividends or employee bonuses, or otherwise suspend CoCo coupon payments. If a bank’s key capital ratio sinks, these bonds can either convert into common equity, which doesn’t pay interest and is the first to be wiped out if a bank fails, or be written off. These factors make the debt riskier to hold than conventional bonds.

Here's another possible troubling angle that I see:

If banks are using CoCo bonds to raise capital, that's all well and good. Investors get the shaft if things go south. However, CoCo Bonds are AT1 meaning that they suffice for post-2008 capital requirements. Now, I am guessing that banks would sure like if their capital requirements were paying a better yield than plain old bonds...

If banks are holding each other's CoCo bonds as a means of meeting their capital requirements, and as CoCo bonds can go POOF into equity, then we are talking about a systemic meltdown as banks scramble to recapitalize to make up for their AT1 holdings transforming into equity of another distressed bank.

EDIT: It looks like Basel III said no to Cocos for AT1 requirements, but looking at the schedule, there might be a 10-year grace period, starting in 2013. I am having a difficult time finding if banks are currently using them as significant AT1. Apparently US banks are less incentivized to issue CoCos as EU banks, since they are taxed as equity rather than debt, so the interest payments are not tax deductible. Of course, they might have bought them to meet capital requirements, however.