Innovative hybrid financing is one popular method of hybrid financing. A hybrid debt security is a form of debt security, which is blended with derivatives like swap, forward or option. Previously, the most popular type of hybrid security was the convertible debenture or convertible bond.
In the earlier part of 1980s, nevertheless, a unique category of hybrid securities achieved a lot of recognition, specifically in the United States. The distinguishing aspect of this type of securities is that the returns are associated with a number of common economic variable quantities, for example, commodity price, foreign exchange rate, rate of interest, share market index and many others.
The hybrid securities are usually fundamental tools that are utilized for handling risk. Hybrids can be categorized into the following types:
Hybrids for handling commodity risk: Oil-indexed bond, which was issued by Standard Oil in the year 1986. This blended a zero coupon bond along with a call option on oil with similar maturity period
Hybrids for handling foreign exchange risk: Dual currency bond, which was issued by Philip Morris Credit in the year 1985. The coupon payments were disbursed in Swiss francs and the principal was disbursed in United States Dollar.
Hybrids for handling interest rate risk: Inverse floating rate notes. The Student Loan Market Association or Sallie Mae issued this hybrid security in the year 1986. They were also known as yield curve notes. These notes can be broken down into two portions, i) a plain vanilla interest rate swap and ii) a variable rate bullet repayment note
Hybrids for diminishing the differences between bondholders and stockholders: Variable rate, rating sensitive note. This was issued by Manufacturer Hanover in the year 1988.
There are two principal financial reasons behind the acceptance of hybrid financing and they are the following:
They play an important role, which makes the market more comprehensive
They offer regulatory or tax benefits
Last Updated on : 27th June 2013