Corporate Hybrids

Abstract

While hybrids are an important part of the regulated capital of banks and insurers, corporations are free from regulatory constraints in deciding about their capital structures. Hybrid securities are attractive to corporations because they offer flexibility without diluting share capital - a cost-effective alternative to issuing equity since coupon payments are generally tax deductible and dividends are not. Unlike financial hybrids, corporate hybrids usually are not convertible into equity, so a company can issue them without risking dilution of equity stakes held by existing shareholders. Common features of European corporate hybrid issuances are:

• Cumulative coupon deferral with a dividend pusher/stopper;¹

• Long tenors or no maturity date at all. There are moderate incentives to redeem;

• Certain call options with call dates that typically take effect 5 or 10 years after the date of issuance. The securities are typically valued in the market on the assumption that an issuer will redeem them on the first call date;²

• Subordination;

• The absence of a conversion/principal write-down mechanism, which is a feature of financial hybrids.