Hybrid capital is a ‘subordinated’ form of capital that sits between senior debt and common equity. By investing in high quality issuers lower down in the capital structure, hybrid capital provides an opportunity to achieve higher returns and enhanced yield.
The global hybrid capital market is over USD1.2trn and is a key vehicle for the world’s leading banks, insurance companies, asset managers and corporations. Typically it is issued by investment grade companies as:
Regulators and rating agencies see hybrid debt as equity on the balance sheet due to flexibility of terms
Coupon payments are tax deductible as they are seen as interest, which makes hybrid debt cheaper to issue than common equity
Investors are compensated for giving this flexibility in the pre-all period
With higher inflation expected as the global economy opens up and interest rates are looking unlikely to rise in the short term, hybrid bonds offer attractive returns compared to the low levels of income provided by government, investment grade and high yield bonds.
The following Sanlam fund invests in hybrid capital: