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Corporate bonds: Hybrid corporate debt makes its mark

Subordinated debt gives treasurers a new means of raising equity capital

Several years of corporate deleveraging and balance sheet repair would appear to be at an end. This June the euro corporate market boasted its biggest monthly volume since June 2003 (€19 billion versus €24.75 billion) and its most dynamic new development since the 50-year sector was opened and shut by Telecom Italia in March.

Corporate treasurers have long envied counterparts at financial institutions. Via their ability to issue hybrid tier 1 capital instruments, banks – and more recently insurers – have boosted capital without diluting equity. These regulatory capital instruments have grown ever more popular following their approval by the Basle Committee, but unregulated entities such as corporates were not under the same stimulus. Furthermore, rating agencies failed to provide clarity on what was needed to provide explicit guidance on what was permissible.

Early attempts to get a hybrid corporate market off the ground had stalled as a result of inadequate investor interest, and issuers had received little credit from rating agencies. These included, in 2003, a €400 million issue for Linde and one worth €500 million for Michelin – but neither of these received much recognition from the agencies. In the past year, Casino managed a €600 million bond but this was retail targeted.

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