A new breed of bank debt that turns into equity if a lender hits trouble is becoming the instrument of choice for some Southern European governments as they prop up their ailing banks.

The instruments, known as "contingent convertibles," began to get attention following the financial crisis and have been issued by a few banks. "Cocos," as they are called, are sold as interest-bearing debt that has to be paid back. But they convert to equity in the event that a bank's capital ratios fall below certain levels.