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How did we get here?

Why corporate hybrids are not all they’re dressed up to be

Securities designed to look like equity for one audience and debt for another are not new. Banks and insurance companies have issued substantial volumes since the late 1990s. And even before the bank tier one and lower tier two markets grew up, corporate hybrids had been knocking around since the early 1990s in the US in the form of preference shares. They have periodically appeared in Asia and a funky market of various exotic hybrid structures has been growing in Australia since 2000.

Why the sudden excitement then? Partly, it’s lack of institutional memory. Bankers move between jobs and firms, and old trades are forgotten. Partly it’s marketing. There are European corporate treasurers and CFOs who like to feel they’re at the cutting edge of the new capital markets technology, not dusting off something Australian corporates were doing six years ago and Americans a decade ago. Mainly, though, it’s down to the rating agencies.

They are now giving greater equity credit than in the past to deals that meet certain standards of subordination and capacity for maturity extension and coupon deferability. Structures that might once have been regarded as 25% equity now get 50% equity credit and ones that used to get 50% equity treatment can now claim 75% equity content.

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