Hybrid securities and hiring growth: Guest comment

Steve Sahara is Managing Director, Global Head of Hybrid Capital Structuring, Calyon. Here he outlines the potential as he sees it for the market and for those looking to get in.

Which area of debt capital markets is set to take off in 2006? The hybrid capital security market, and talent from various sectors outside of traditional DCM roles is called for to service clients' needs for these products.

Considered a growth sector on both sides of the pond, hybrid securities are part equity and part debt. They have features in common with traditional bonds, preferred stock and even convertible bonds and common stock.

They offer issuers a number of advantages: ultra low cost, long-term funding or regulatory capital, potential for equity accounting, as well as rating agency equity credit and balance sheet strength via deleveraging.

Hybrids also provide a flexible financing tool that is key for planning M&A driven growth. It's little surprise then that billions of USD/EUR of hybrid capital securities have already emerged in Europe and the US, issued by the likes of Porsche, Thomson, Bayer, Vattenfall, DONG, Stanley, ILFC, Zurich, and Burlington Northern.

What are the implications for jobs? Growth in hybrid issuance benefits anyone with experience in structured products, corporate financial analysis, financial regulatory capital and rating agency advisory. This is because it is necessary to understand how the hybrid will fit in to the overall capital structure of the hybrid issuer.

Anyone with senior strategic relationships may also find themselves top of the hiring pile - and should be ready to talk about hybrids. Hybrid issuing decisions are often complex and taken at various levels within corporate organisations, involving the treasurer, CFO, CEO and board. People able to work at this kind of strategic level are likely to be prized in this market.

If you want to work with hybrid products, it will also help if you can demonstrate an awareness of product innovations in related areas, and changes in regulations, laws and ratings requirements.

The product area has consistently evolved to provide more solutions for a wider range of issuers and this shows no signs of stopping soon. Although the trend has been toward simplified hybrid securities issued directly by the parent company, there are situations which require the use of special purpose vehicles (SPV), derivatives and even the structuring techniques of the asset backed securities and collateralised dedt obligations (ABS/CDO) product world in order to achieve the optimal solution for the issuer.

The structuring aspects of creating a hybrid are also driving the involvement of key technical areas such as tax, accounting (IFRS) and legal - all of which can be crucial to meeting the issuer's objectives.

If you're interested in working with hybrid capital securities, now is the time to look into your options.

This is a cyclical business. Regulated financial institutions issue hybrids regularly due to their need to maintain regulatory capital and the hybrids low cost versus traditional forms of Tier 1 capital such as common or preferred stock. But corporate issuers tend to leap aboard the bandwagon more opportunistically at particular points in the business cycle when (like now) interest rates and credit spreads are at historical lows and M&A is a topic in every boardroom.

Current interest in hybrids is long overdue. The last major wave of issuance occurred in 1993, when the first tax deductible "synthetic preferred stock" was issued by Texaco, prompting other US corporates to follow suit.

Rating agency Moody's has fueled today's explosive growth with their 2005 Toolkit which spells out the structural features that provide 50% - 75% "equity credit" for the hybrid securities. This enables corporates to issue securities that provide equity strength to their balance sheet without dilution and at a cost that is only far closer to the cost of senior debt than to the cost of common stock both in terms of required investor returns and fees.

Expect considerably more growth in both products and jobs as 2006 progresses.