[private role=’subscriber’]
The market for hybrid securities in overseas markets has seen some significant developments recently that could provide a glimpse of what could be in store for the domestic market before long.
Total, the French oil group, recently saw demand of €20bn for its €5bn hybrid, the biggest such issue on a single day heralding the return of the hybrid after something of a hiatus in the post-GFC period. European firms like Merck, Bayer, Volvo, Volkswagen, EDF, Orange, Telefónica, TDC and Accor have all recently taken the plunge and issued new hybrids. Indeed the value of hybrid issuance by European non-financials clocked in at almost US$46bn last year compared with US$425m in 2008, according to data from Dealogic.
From an issuer perspective, the attraction of hybrids is that the lead ratings agencies tend to treat hybrids as 50 per cent equity and 50 per cent debt and this helps an issuer’s overall debt profile from a credit rating perspective. Equally importantly, for tax purposes hybrids are treated as bonds which means that the interest costs are tax deductible.
It is a real sign of development of the sophistication of a financial market when instruments that are designed for one purpose are used for another. The hybrid market has just seen such a development as UBS announced that is will issue Additional Tier 1 capital instruments for employee compensation. The bank says that it has enhanced certain features of its employee compensation framework in anticipation of increased focus on Tier 1 capital instruments. The bank’s Deferred Contingent Capital Plan (DCCP) awards will qualify as fully applied Additional Tier 1 capital under Basel III regulations and should be applied from 2014 onwards and should optimise the capital efficiency of these plans under Basel III. UBS is the first bank to introduce such an instrument but there is no reason to imagine that this initiative will not be replicated elsewhere.
[/private]