OUR SPECIALITY

HYBRID BONDS

Hybrid bonds are an attractive financial instrument for the issuer and especially for the investor. As one of the few specialists in Europe, we focus in the bond area on hybrid bonds.

Key benefits

Higher Income

Due to the subordination of the bonds, hybrid bonds pay a higher coupon as plain bonds do.

Quality issuers

Due to the subordination of the bonds, issuer quality is key. We focus on high-quality companies only and monitor their credit quality carefully.

Inflation protection

A large number of hybrid bonds feature have an implicit inflation protection. This is because of a switch to a floating interest rate (fixed-to-float structure) directly after the first possible call date.

higher coupons

Advantages for the investor

The asset class is particularly suitable for investors who are looking for an additional return on a solid debtor structure compared to classic bonds. Due to the different structural characteristics and the great importance of debtor quality, selection in the hybrid environment is particularly crucial for success. We have specialised in this area and, thanks to a proprietary database that is unique in the sector, we can successfully support institutional investors with a traditionally high bond quota in their asset allocation. For our private clients, hybrid bonds are just as interesting due to solid debtors and higher interest payments.

Compared to senior bonds, hybrid bonds offer investors a higher yield. Although hybrid bonds have a very long or indefinite maturity, they are usually redeemed early by the issuer. The probability of redemption is influenced by certain incentives. Most recently, the abolition of the equity capital charge in particular has led to an increased probability of termination, as rating agencies, banks and banking supervisors have been imposing stricter requirements on the equity capital charge since the financial crisis. The subsequent increase in the probability of termination has led to a growing demand for hybrid bonds and thus to rising prices.

Hybrid bonds offer investors higher returns compared to senior bonds. Although hybrid bonds have a long or indefinite term, they are usually redeemed early by the issuer. The probability of termination is influenced by certain incentives. Most recently, the omission of the capital charge led to a higher probability of termination, since rating agencies, banks and banking regulators have set stricter requirements for the imputation as equity. The resulting higher probability of termination has led to a growing demand for hybrid bonds and thus to rising prices.

BALANCE SHEET STRUCTURE

Benefits for the issuer

Due to the equity features of subordination and the theoretically indefinite maturity, hybrid bonds can count as a percentage of equity capital in the sense of rating agencies, banking supervision as well as accounting standards. As a result, financing by issuing hybrid bonds may improve the issuers' rating, which in turn helps them to obtain better conditions on the capital market. Since hybrid bonds can be repaid early by the issuer, they allow the bridging of a temporary equity capital requirement. In addition, coupons paid can be claimed against tax and thus enjoy tax debt treatment.

More information

Further information on hybrid bonds can be found in the DCP whitepaper