The Handbook of Hybrid Securities: Convertible Bonds, CoCo Bonds and Bail-In

1 Hybrid Assets

1.1 INTRODUCTION

This chapter provides a general introduction to the different categories of hybrid debt and delivers the basic knowledge needed to move deeper into hybrid territory. Hybrid instruments are often misunderstood and hence mismanaged. They are not equity instruments with bond-like risk. Neither are they instruments with bond returns flavored with equity risk. Further, it is also difficult to come up with a standardization when it comes to categorizing hybrid debt. In this introductory chapter we cover the obvious and well-known instruments, such as preferreds and convertible bonds. These are the cornerstones of corporate hybrid debt. The chapter also contains a primer on bail-in capital, contingent convertibles, and financial hybrid debt such as Tier 1 and Tier 2 bonds.

1.2 HYBRID CAPITAL

Hybrid securities are located at the crossroads between debt and equity. This asset class combines properties of common equity and corporate debt. The most outspoken subcategories of hybrid securities are convertible bonds and preference shares (preferreds). Further, in the capital structure of banks and corporates, one can also find quite often hybrid instruments belonging to the category of subordinated debt. These are hybrid bonds and have an equity-like character because of their long (sometimes perpetual) maturity, deep subordination, loss absorption, and the possibility of a coupon deferral. These securities illustrate that the split between debt and equity ...