Hybrid debt: US issues are no longer a basket case
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Hybrid debt: US issues are no longer a basket case

Hybrids will drive investment-grade issuance this year. The emergence in mid-December of Burlington Northern’s $500 million hybrid debt transaction via Merrill Lynch and Goldman Sachs indicated that the first US corporate hybrid, issued by Stanley Works the previous month, was not a one-off.

In November toolmaker Stanley sold a $450 million 40-year non-call five-year issue via Citigroup, Goldman and UBS called enhanced trust preferred securities (E-Trups) to finance its planned acquisitions of Facom Tools and National Manufacturing. This is just the start in the US of a theme that had already developed in Europe.

Hybrid debt in Europe is a story of constant innovation; first by banks, then insurers and finally corporates. CFOs and treasurers like hybrids because, although they are similar to equity, they are a much cheaper form of capital and offer tax deductibility.

The trigger for the takeoff of European corporate hybrid issuance during 2005 was a change of stance from the rating agencies. Standard & Poor’s more accommodative stance on allowing equity credit for debt securities in 2004 triggered a hybrid bond for France’s Casino. In February 2005 Moody’s Investors Service relaxed its position, and there followed some €5 billion of corporate issuance as well as a host of deals from financial institutions, which incorporated features to receive equity credit from the ratings agencies. For once the European debt market has been ahead of the curve.

Europe takes the lead

“In the US, unlike in Europe, it took us longer to develop a transparent structure that issuers and investors were comfortable with,” says John Dickey, global head of the new products group at Citigroup.

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