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Hybrids: US hybrid market heats up

Competitive pressures are driving US banks and corporates to use the new wave of hybrids.

Hybrids are enhancing shareholder value in a way never seen before. That was one of the key lessons that came out of the Euromoney US hybrid conference held in New York at the beginning of November.

Speaking at the conference, Daryl Bible, executive vice-president and treasurer of Bancorp, said that there was increasing earnings pressure in the US. Competition is increasing. Activity like corporate buybacks and bigger dividends are all part of the need to increase earnings per share. Hybrids are an excellent tool for lowering the weighted average cost of capital.

“Banks are doing wholesale recapitalizations. That means that for the first time they are looking at capital ratios that include hybrids, rather than just the common equity of old,” says Scott Romanoff, head of hybrids at Goldman Sachs.

Washington Mutual, Sun Trust, US Bancorp and Wachovia have done this comprehensive restructuring using a new style of hybrids that are tier 1 and yet tax deductible.

In effect, US institutions are starting to replicate what has gone on in Europe for several years. European banks have engaged in a complex and seemingly arcane race to be the most capital efficient compared with domestic and international competition.

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