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Hybrid securities are a broad group of securities that combine the characteristics of the two broader groups of securities, debt and equity.

Hybrid securities pay a predictable (either fixed or floating) rate of return or dividend until a certain date, at which point the holder has a number of options, including converting the securities into the underlying share.

Therefore, unlike with a share of stock (equity), the holder enjoys a predetermined (rather than residual) cash flow, and, unlike with a fixed interest security (debt), the holder enjoys an option to convert the security to the underlying equity. Other common examples include convertible and converting preference shares.

A hybrid security is structured differently than fixed-interest securities. While the price of some securities behaves more like that of fixed-interest securities, others behave more like the underlying shares into which they may convert.

Examples


Important terms

  • Price moves in line with share price (fixed conversion terms e.g. 1 hybrid convert to 1 share)
  • Bond like, price does not move in line with share price (variable conversion terms, face value (usually $100) convert to $100 worth of shares).
  • Cumulative: missed dividend payments are added to the next dividend payment.
  • Non-cumulative: missed dividend payments are forgone.
  • Redeemable: At certain times the holder may have the option to sell the securities back to the company at the face value/issue price.
  • Non-redeemable / irredeemable: The company is not offering to buy the securities back.

Basket D security

The most popular hybrid among financial institutions (banks and insurance companies) is the Basket D security. Basket D is a reference to a point on Moody's debt-equity continuum scale that treats the hybrid as 75% equity and 25% debt. In order to qualify, the security must give the issuer the right (or even the obligation) to roll-over the security at expiry to an indefinite or long maturity bond and to suspend dividends (effectively coupon payments, but to reflect the equity nature of the security, the term "dividend" is used). Most Basket D issuances have been structured in a way that also preserves the tax deductible nature of their interest payments, avoiding double taxation/customs.

See also

References

  1. ^ "Introduction to Canadian Convertible Debentures" (PDF). Voya Vasiljevic, ScotiaMcLeod. March 15, 2009. Archived from the original (PDF) on March 18, 2009. Retrieved March 15, 2009.
  2. ^ "Redeemable preferred stock". AccountingTools. Retrieved 2019-07-08.
  3. ^ Kenton, Will. "Callable Preferred Stock". Investopedia. Retrieved 2019-07-08.