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Hybrids: Corporate hybrids back in vogue

Rating agency clarification boosts market; Some investors say hybrid debt is flawed

sales of corporate hybrids, a five-year high

Hybrid securities were once considered a cheap form of equity or a costly form of debt but demand for fixed-income assets, and prolonged low interest rates, have changed all that. Along with a favourable judgement by rating agencies on how hybrids affect an issuer’s credit rating, sales of European corporate hybrid bonds have surged to a five-year high of €5.2 billion in little more than a month. In September alone, UK power company Scottish & Southern Energy sold £1.2 billion of the securities, followed a few weeks later by German utility RWE, which issued €1.5 billion. In between these, Suez Environnement and Australian oil company Santos completed smaller deals, after Dutch power utility TenneT had got the ball rolling in February.

Structural homogeneity

Most of this paper has been structured in the same way. The securities are perpetual with optional issuer calls at par after five and 10 years and every coupon payment date there­after. Interest payments are optionally deferrable. Calls after five years are governed by a legally binding replacement capital covenant (RCC), with intention-based replacement language covering all issuer calls.

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