Hybrid Capital Securities

A Definitive Guide For Issuers And Investors

Publication Date	October 2007
Publisher	IFR Market Intelligence
Product Type	Report
Pages	177
ISBN Number	not applicable
Product Code	IFR00011

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Summary

By Steve Sahara with Annabel Daws-Chew

Issuers and investors worldwide have embraced hybrid securities as an exciting new debt capital markets opportunity. For issuers, hybrids are a flexible tool for managing the capital structure, and for investors, the hybrid asset class offers incremental investment yield opportunities.

The global hybrid capital market has grown dramatically and has continued to evolve over the past 15 years. Precisely because of the "hybrid" nature of the asset class, it continues to

evolve and defy attempts to create a simple universal explanation.

The product developments within the hybrid market are often in response to changes in legal, accounting, tax, regulatory or rating agency frameworks, which impact the form and applicability of hybrid instruments. For a newcomer to the hybrid market, the current tapestry of structuring nuances can seem arcane and even non-sensical without a timeline of the historical layering of regulatory requirements and financial engineering responses.

Hybrid Capital Securities also contains the key hybrid capital security developmental milestones which have occurred over time and puts them in context, so that issuers and investors can form a better appreciation of the rational for typical contemporary hybrid securities today and glean what the future may bring.

Who Should Read It?

Whether you are an investor or issuer you will find this report an indispensable guide to understanding exactly how to evaluate the benefits and risks of hybrid securities. The strategic nature of hybrid issuance usually means that the ultimate issuance decision is made by the "C level" senior management (CEO/CFO) and the Board of Directors - therefore the ability to quickly but thoroughly brief these executives is essential. Similarly when investors are taking the decision to invest in hybrids as an asset class or evaluating and comparing hybrids in the market there is a need to rapidly come up to speed on this intricately complex array of securities that may appear more similar on the surface than the details later reveal. Therefore, the report will allow the reader to navigate the hybrid landscape quickly and efficiently and be alert to the most important distinctions to focus on going forward.

Content

Chapter 1: Hybrid Capital Market Overview
- What Are Hybrid Capital Securities?
- Definition Dilemma
- The Preferred Stock Paradigm
- Some Bank Regulatory History
- The Basel Capital Accord
- Rating Agency Impact
- Accounting, Legal And Tax Considerations
- Who Are The Issuers?
- Issuance Trends
- The Corporate Hybrid Market Has Shown Dramatic Growth And Structural Innovation
- Diversity And Globalisation Prevalent In Geographical Issuance Trends
- Who Are The Investors?
- Institutional And Retail, Private Bank Investors
- Retail, Private Bank
- Evolution Historical Milestones And Outlook
Chapter 2: The Market For Hybrid Capital Securities
- Introduction
- Hybrid Market Size, Structure And Growth
- Geographic Issuance Trends
- Europe
- The Us
- Asia
- Focus: India
- Issuer Sector Trends
- Banks
- Focus: Institutional True Perpetual Market Continues To Take Shape
- Insurers
- Corporates
Chapter 3: Why Issue Hybrid Capital Securities?
- Introduction
- The Rationale For Issuance
- Who Issues Hybrid Capital Securities?
- The Rationale For Issuance
- Michelin
- Linde
- Suedzucker, Vattenfall And Dong
- Henkel
- Porsche/Glencore
- Cemex
- Conclusion
Chapter 4: Investor Overview
- Introduction
- Investors In Hybrid Securities
- Institutional Investors
- Asset Managers
- Pension Funds
- Insurance Companies
- Hedge Funds
- Banks
- Retail Private Bank Market
- Key Investor Trends Europe (Uk, France,
- Germany) And The Us
- Hybrid Capital Uk Investors
- Hybrid Capital German Investors
- Hybrid Capital French Investors
- Hybrid Capital Us Investors
- Investor Dynamics And Motivation To Buy Hybrids
- Hybrids Versus Senior Debt With Similar Credit Quality
- Stronger Credit Quality
- Liquid Markets
- Strength Of New Issue Performance In The Secondary Markets
- Market Volatility
- Dedicated Hybrid Funds
- Hedging
- Investor Risk Factors
- Evaluating The Price For Hybrid Capital Securities
- Spread Analysis For Bank Capital
- Spread Analysis For Corporate Hybrid Securities
- Pricing True Perpetual And Step-Up Tier
- Viewpoint: Investing In Hybrid Securities
Chapter 5: Structuring Hybrid Capital Securities
- Introduction
- Technical Foundations
- Regulatory Capital
- What Is Regulatory Capital For?
- General Characteristics Of Bank Capital (Based On Bis Guidelines)
- Tier 1 Hybrid Instruments
- Tier 2 Hybrid Instruments
- Tier 3 Capital
- Legal
- Tax
- Spv Hybrids
- Typical Spv Structure
- Summary Rating Agency Guidelines
- Discussion Point: How To Achieve A Moodys
- basket C Or basket D
- Practical Considerations
- Addressing Investor Non-Payment Risk
- Payment Deferral Conditions
- Deferred Payment Resolution
- Addressing Investor Extension Risk
- Addressing Investor Event Risk
- Change Of Control Clause (Coc)
- Issuer Protections
- Accounting Guidelines
- Rating Agency Approaches To Hybrid Capital
- Moodys Approach
- Market Precedent And Application Of The
- Moodys Methodology
- Discussion Point: Mandatory Deferral
- Discussion Point: Replacement Language
- Standard & Poors Approach
- Fitchs Approach
- Rating Agency Evolution Promotes Increasing Market Sophistication
- Taxation Perspective
- A Brief History And Current Developments
- Early Attempts To Create Deductible Equity
- Rev. Rul
- Mips, Etc
- Treasury Department And Legislative Responses
- Regulatory Developments
- Current Tax Developments
- Tax Treatment Of New (And Old) Equity-Like Features
- Current Structures
- Hybrids Issued By Foreign Issuers In The Us
- Viewpoint: Rating Agency Approach To Hybrid Securities
- Summary Corporate Hybrid Transactions
Chapter 6: Structural Considerations Focus On Select Countries
- Introduction
- France
- The French tss Structure For Hybrid Securities
- Overview
- Some History
- Operating Subsidiary Tier
- Evolution
- More Recent Developments
- Italy
- Bank Of Italy Status And Developments
- Current Innovative Tier 1 Structuring Opportunities
- Hybrid Structuring In Italy
- Recent Developments
- Two Key Issues
- Spain
- The Preferentes Structure
- Germany
- Tier 1 Issued Via An Spv
- Tier 1 Issued Via A Stille Einlage
- Tier 1 Via A Stille Einlage Using A Jersey Limited
- Partnership (Lp)
- Focus: German Corporate Hybrid Securities Tax
- Overview
- German Hybrid Capital Specifications
- Obtaining A Tax Ruling
- Withholding Tax Considerations
- German Corporate Law
Chapter 7: The Future Of The Hybrid Market
- Introduction
- Growing The Investor Base
- Expansion Of The Issuer Pool
- Tax, Accounting, Rating Agency And Regulatory
- Conclusion
Tables & Figures
Tables
- 1.1: The Preferred Stock Paradigm
- 1.2: Hybrid Capital Issuance By Sector, 200406 (%)
- 2.1: Top 10 Bank Tier 1 Hybrid Transactions, 2006 To Date (m)
- 2.2: Select True Perpetual Institutional Issuance, 200006 (m)
- 2.3: Top 10 Insurance Sector Hybrid Transactions, 2006 To Date (m)
- 2.4: Top 10 Corporate Sector Hybrid Transactions, 2006 To Date (m)
- 3.1: A Selection Of Major Hybrid Capital Deals
- 4.1: Select Retail Private Bank Issuance, 200507 (m)
- 4.2: Select Uk Investor Feedback
- 4.3: Select Uk Hybrid Investors
- 4.4: Select German Investor Feedback
- 4.5: Select German Hybrid Investors
- 4.6: Select French Investor Feedback
- 4.7: Select French Hybrid Investors
- 4.8: Select Us Investor Feedback
- 4.9: Select Us Hybrid Investors
- 4.10: Hybrid Capital Valuing Equity Features
- 4.11: Dual-Tranche Transactions, 2006
- 4.12: Corporate Hybrid Spread Performance, 2006
- 4.13: Risk Continuum Investor Perspective
- 4.14: Examples Of Structural Conservatism
- 4.15: Spread Analysis Bank Capital Vs. Corporate Hybrid Debt (%)
- 4.16: Hybrid Evaluation mechanical Approach
- 4.17: Hybrid Evaluation pragmatic Approach
- 4.18: Example Of Step Vs. Non-Step Premiums
- 5.1: Hybrid Securities Summary Primary Foundations
- 5.2: Moodys Framework For Classification
- 5.3: Moodys Debt-To-Equity Continuum (%)
- 5.4: S&Ps Framework For Classification
- 5.5: Fitch Debt-To-Equity Continuum
- 6.1: France Hybrid Capital Market Structure
- 6.2: France Total Tier 1 Capital Breakdown
- 6.3: Lottomatica First Corporate Direct Issuance
- 6.4: Germany Hybrid Capital Market Structure
- 7.1: New Entrants To The Hybrid Capital Market
Figures
- 1.1: Issuer Structures
- 1.2: Corporate Hybrid Issuance, 2003 To Date (m)
- 1.3: Hybrid Capital Issuance By Issuer Region, 2005 Vs. 2006
- 1.4: Institutional Hybrid Investors Illustrative Global Breakdown (%)
- 2.1: Global Hybrid Securities Market, 1999 To Date (m)
- 2.2: European Hybrid Capital Issuance, 2005 To Date ()
- 2.3: European Market Hybrid Capital Supply, 2006 To Date (%)
- 2.4: Us Market Hybrid Capital Supply, 2006 To Date (%)
- 2.5: Asian Market Hybrid Capital Supply, 2006 To Date (%)
- 2.6: Indian Bank Capital Issuance, 2002 To Date (m)
- 2.7: Indian Bank Capital Issuance, 2006 To Date (m)
- 2.8: Bank Tier 1 Sector Hybrid Issuance, 2006 To Date (m)
- 2.9: European Bank Tier 1 Issuance (%)
- 2.10: Insurance Sector Hybrid Issuance And Spread Development, 2006 To Date (m)
- 2.11: European Hybrid Insurance Issuance (%)
- 2.12: Corporate Sector Hybrid Issuance And Spread Development, 2006 To Date (m) 2.13: European Corporate Hybrid Issuance (%)
- 3.1: Expected Market Returns, By Country (%)
- 3.2: Wacc Calculation Common Equity Vs. Hybrid Debt (%)
- 3.3: Cost Of Equity Alternatives (%)
- 3.4: Issuer Motivations
- 3.5: Corporate Issuers
- 4.1: Investor Distribution For An Institutional European Hybrid Transaction (%)
- 4.2: Hybrid Capital Distribution, By Region (%)
- 4.3: Hybrid Capital Distribution, By Region (%)
- 4.4: Hybrid Capital Distribution, By Region (%)
- 4.5: Hybrid Capital Distribution, By Region (%)
- 4.6: Hybrid Capital Volumes Vs. Vdax Index, 200007 (m)
- 4.7: True Perpetual Vs. Step-Up Hybrid Securities, Janjuly 2007
- 5.1: Primary Technical Foundations
- 5.2: Preferred Stock Paradigm
- 5.3: Insurance Hybrid Structure, Example
- 5.4: Insurance Hybrid Structure, Example
- 5.5: Insurance Hybrid Structure, Example
- 5.6: Optional Early Redemption Analysis
- 5.7: New Hybrid Transaction Time And Responsibility Schedule
- 5.8: Global Hybrid Tier 1 Capital Origins
- 5.9: Hybrid Tier 1 Structuring Considerations
- 6.1: Italian Hybrid Tier 1 Structure Via A Us Trust
- 6.2: New Italian Hybrid Tier 1 Structure Eu Spv
- 6.3: German Tier 1 Structure
- 6.4: German Stille Einlage Structure
- 6.5: German Stille Einlage Structure With Jersey Lp