It stands for loss-absorption mechanism trigger; a feature that is embedded in a contingent convertible bond (CoCo bond) whereby it would would convert to equity or have its principal written-down (PWD trigger). This trigger, once set off, provides additional loss-absorbing capacity to a bank or similar financial institution, while it is still a going concern (going concern capital).
When the trigger is hit, these bonds can potentially increase the magnitude of risk if shareholders gain at the expense of CoCo holders (in the case of conversion or write-down). Risk-taking effects of CoCo bonds depend on the direction and the amount of the funds transfer between equity holders and CoCo holders upon triggering of LAM.
Comments