Table of Contents
CHAPTER 1: HYBRID CAPITAL MARKET OVERVIEW
CHAPTER 2: THE MARKET FOR HYBRID CAPITAL SECURITIES
CHAPTER 3: WHY ISSUE HYBRID CAPITAL SECURITIES?
CHAPTER 4: INVESTOR OVERVIEW
CHAPTER 5: STRUCTURING HYBRID CAPITAL SECURITIES
CHAPTER 6: STRUCTURAL CONSIDERATIONS – FOCUS ON SELECT COUNTRIES
CHAPTER 7: THE FUTURE OF THE HYBRID MARKET
TABLES & FIGURES
CHAPTER 1: HYBRID CAPITAL MARKET OVERVIEW
What are hybrid capital securities?
Definition dilemma
The preferred stock paradigm
Some bank regulatory history
The Basel Capital Accord
Rating agency impact
Accounting, legal and tax considerations
Who are the issuers?
Issuance trends
The corporate hybrid market has shown dramatic growth and structural innovation
Diversity and globalisation prevalent in geographical issuance trends
Who are the investors?
Institutional and retail, private bank investors
Retail, private bank
Evolution – historical milestones and outlook
Back to top
CHAPTER 02
CHAPTER 2: THE MARKET FOR HYBRID CAPITAL SECURITIES
Introduction
Hybrid market size, structure and growth
Geographic issuance trends
Europe
The US
Asia
Focus: India
Issuer sector trends
Banks
Focus: Institutional True Perpetual market continues to take shape
Insurers
CHAPTER 3: WHY ISSUE HYBRID CAPITAL SECURITIES?
Introduction
The rationale for issuance
Who issues hybrid capital securities?
The rationale for issuance
Michelin
Linde
Suedzucker, Vattenfall and DONG
Henkel
Porsche/Glencore
CEMEX
CHAPTER 4: INVESTOR OVERVIEW
Introduction
Investors in hybrid securities
Institutional investors
Asset managers
Pension funds
Insurance companies
Hedge funds
Banks
Retail private bank market
Key investor trends – Europe (UK, France,
Germany) and the US
Hybrid capital – UK investors
Hybrid capital – German investors
Hybrid capital – French investors
Hybrid capital – US investors
Investor dynamics and motivation to buy hybrids
Hybrids versus senior debt with similar credit quality
Stronger credit quality
Liquid markets
Strength of new issue performance in the secondary markets
Market volatility
Dedicated hybrid funds
Hedging
Investor risk factors
Evaluating the price for hybrid capital securities
Spread analysis for bank capital
Spread analysis for corporate hybrid securities
Pricing True Perpetual and step-up Tier 1
Viewpoint: Investing in hybrid securities
Back to top
CHAPTER 5: STRUCTURING HYBRID CAPITAL SECURITIES
Introduction
Technical foundations
Regulatory capital
What is regulatory capital for?
General characteristics of bank capital (based on BIS guidelines)
Tier 1 hybrid instruments
Tier 2 hybrid instruments
Tier 3 capital
Legal
Tax
SPV hybrids
Typical SPV structure
Summary rating agency guidelines
Discussion point: How to achieve a Moody’s
‘Basket C’ or ‘Basket D’
Practical considerations
Addressing investor non-payment risk
Payment deferral conditions
Deferred payment resolution
Addressing investor extension risk
Addressing investor event risk
Change of control clause (COC)
Issuer protections
Accounting guidelines
Rating agency approaches to hybrid capital
Moody’s approach
Market precedent and application of the
Moody’s methodology
Discussion point: Mandatory deferral
Discussion point: Replacement language
Standard & Poor’s approach
Fitch’s approach
Rating agency evolution promotes increasing market sophistication
Taxation perspective
A brief history and current developments
Early attempts to create deductible equity
Rev. Rul. 85-119
MIPS, etc.
Treasury department and legislative responses
Regulatory developments
Current tax developments
Tax treatment of new (and old) equity-like features
Current structures
Hybrids issued by foreign issuers in the US
Viewpoint: Rating agency approach to hybrid securities
CHAPTER 6: STRUCTURAL CONSIDERATIONS – FOCUS ON SELECT COUNTRIES
Introduction
France
The French ‘TSS’ structure for hybrid securities
Overview
Some history
Operating subsidiary Tier 1
Evolution
More recent developments
Italy
Bank of Italy – status and developments
Current innovative Tier 1 structuring opportunities
Hybrid structuring in Italy
Recent developments
Two key issues
Spain
The Preferentes structure
Germany
Tier 1 issued via an SPV
Tier 1 issued via a Stille Einlage
Tier 1 via a Stille Einlage using a Jersey Limited
Partnership (LP)
Focus: German corporate hybrid securities tax
Overview
German hybrid capital specifications
Obtaining a tax ruling
Withholding tax considerations
CHAPTER 7: THE FUTURE OF THE HYBRID MARKET
Introduction
Growing the investor base
Expansion of the issuer pool
Tax, accounting, rating agency and regulatory
TABLES
1.1: The preferred stock paradigm
1.2: Hybrid capital issuance by sector, 2004–06 (%)
2.1: Top 10 bank Tier 1 hybrid transactions, 2006 to date (€m)
2.2: Select True Perpetual institutional issuance, 2000–06 (€m)
2.3: Top 10 insurance sector hybrid transactions, 2006 to date (€m)
2.4: Top 10 corporate sector hybrid transactions, 2006 to date (€m)
3.1: A selection of major hybrid capital deals
4.1: Select retail private bank issuance, 2005–07 (€m)
4.2: Select UK investor feedback
4.3: Select UK hybrid investors
4.4: Select German investor feedback
4.5: Select German hybrid investors
4.6: Select French investor feedback
4.7: Select French hybrid investors
4.8: Select US investor feedback
4.9: Select US hybrid investors
4.10: Hybrid capital – valuing equity features
4.11: Dual-tranche transactions, 2006
4.12: Corporate hybrid spread performance, 2006
4.13: Risk continuum – investor perspective
4.14: Examples of structural conservatism
4.15: Spread analysis – bank capital vs. corporate hybrid debt (%)
4.16: Hybrid evaluation – ‘mechanical’ approach
4.17: Hybrid evaluation – ‘pragmatic’ approach
4.18: Example of step vs. non-step premiums
5.1: Hybrid securities – summary primary foundations
5.2: Moody’s framework for classification
5.3: Moody’s debt-to-equity continuum (%)
5.4: S&P’s framework for classification
5.5: Fitch debt-to-equity continuum
6.1: France – hybrid capital market structure
6.2: France – total Tier 1 capital breakdown
6.3: Lottomatica – first corporate direct issuance
6.4: Germany – hybrid capital market structure
7.1: New entrants to the hybrid capital market
Back to top
FIGURES
1.1: Issuer structures
1.2: Corporate hybrid issuance, 2003 to date (€m)
1.3: Hybrid capital issuance by issuer region, 2005 vs. 2006
1.4: Institutional hybrid investors – illustrative global breakdown (%)
2.1: Global hybrid securities market, 1999 to date (€m)
2.2: European hybrid capital issuance, 2005 to date (€)
2.3: European market hybrid capital supply, 2006 to date (%)
2.4: US market hybrid capital supply, 2006 to date (%)
2.5: Asian market hybrid capital supply, 2006 to date (%)
2.6: Indian bank capital issuance, 2002 to date (€m)
2.7: Indian bank capital issuance, 2006 to date (€m)
2.8: Bank Tier 1 sector hybrid issuance, 2006 to date (€m)
2.9: European bank Tier 1 issuance (%)
2.10: Insurance sector hybrid issuance and spread development, 2006 to date (€m)
2.11: European hybrid insurance issuance (%)
2.12: Corporate sector hybrid issuance and spread development, 2006 to date (€m) 2.13: European corporate hybrid issuance (%)
3.1: Expected market returns, by country (%)
3.2: WACC calculation – common equity vs. hybrid debt (%)
3.3: Cost of equity alternatives (%)
3.4: Issuer motivations
3.5: Corporate issuers
4.1: Investor distribution for an institutional European hybrid transaction (%)
4.2: Hybrid capital distribution, by region (%)
4.3: Hybrid capital distribution, by region (%)
4.4: Hybrid capital distribution, by region (%)
4.5: Hybrid capital distribution, by region (%)
4.6: Hybrid capital volumes vs. VDAX Index, 2000–07 (€m)
4.7: True Perpetual vs. step-up hybrid securities, Jan–July 2007
5.1: Primary technical foundations
5.2: Preferred stock paradigm
5.3: Insurance hybrid structure, example 1
5.4: Insurance hybrid structure, example 2
5.5: Insurance hybrid structure, example 3
5.6: Optional early redemption analysis
5.7: New hybrid transaction – time and responsibility schedule
5.8: Global hybrid Tier 1 capital origins
5.9: Hybrid Tier 1 structuring considerations
6.1: Italian hybrid Tier 1 structure via a US trust
6.2: New Italian hybrid Tier 1 structure – EU SPV
6.3: German Tier 1 structure
6.4: German Stille Einlage structure
6.5: German Stille Einlage structure with Jersey LP
Back to top
