The new generation of corporate hybrids is becoming an increasingly popular acquisition finance tool in Europe, so could these products wipe out demand for other hybrid products such as traditional equity-linked bonds in M&A financings altogether, just as the latter are making a comeback?
“It would certainly be right to call it a competing product in certain cases,” says Claude Raiffel, head of equity-linked origination for HSBC. “But the big differences are that hybrid straight debt is relatively easily accessible to quality, highly rated issuers but not to those with a lower credit rating,” says Raiffel. “As a hybrid tends to be rated two or three notches below the rating of the issuer, it is not as yet a product that can work as an M&A financing tool for low investment-grade or sub-investment-grade issuers.”
According to Raiffel, it would be difficult for lower-rated issuers to raise enough cash to fund an acquisition in this new hybrid market. “It does not yield as much as high-yield issues, cutting out the demand from high-yield investors, and with a sub-investment-grade rating it is not accessible to investment-grade investors.”
Martin Fisch, head of equity-linked origination at Deutsche Bank, also believes that the corporate hybrid and the traditional equity-linked markets can co-exist. He says that the corporate hybrid is addressing a different need for issuers: “They typically do it to get equity credit, rather than for cheap financing, as is the case with a convertible. Hybrid bonds are generally fairly expensive to issue.”
Nevertheless, he thinks that issuers could be enticed to draw on the best parts of both markets. “The growing use of hybrids does indicate that companies are starting look at more sophisticated structures, which is a good thing for the market,” says Fisch. “One thing that we may see in the coming year is people starting to look at the convertible hybrid, which could be quite interesting.”
