Hybrid Capital

[Mazinbrum]

A pension fund I am looking at invests in Hybrid Capital as an option. I'd never heard of this before, is it a well known option?
As I'd never heard of it (not that that means much) I was wondering is it an established investment and how established is the market, ie are the funds liquid and quoted if that's the right terminology?

[matrignano]

It's typically a bond investment with equity-like features, e.g. convertible bond, AT1s/CoCos etc,

Hybrid debt is subordinated to senior debt, and therefore pays higher coupons, but is also riskier as it can be converted to equity should the company not perform within expected parameters.

If you are happy with the credit risk analysis of a company, it can pay to go down the capital structure and buy hybrid or sub debt.

[chip*]

Going back many years from my memory bank when I use to manage the Leverage Finance desk now.

Could also be Mezzaine debt (favoured by start up Co's) with an embedded warrant allowing the lender to convert their debt to an equity stake at a specific time or event. Popular with start up Co's as they are generally short of cash, so rather repay the interest, the borrower sacrifice a share of equity. Debt has high margin = high profitable for the lender, but also much riskier asset as highlighted above.

Edit to add; even if the lender converts their holding to equity, they still need payback which only occur if the start up Co. goes public (flotation) / bought out by a competitor. Basically, it's a long term investment commitment for investors with a healthy risk appetite.

Edited by chip* on Tuesday 3rd December 15:48