Other Hybrid Securities

Hybrid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and equity. Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date, at which point the holder has a number of options including converting the securities into the underlying share.

Therefore, unlike a share of stock (equity) the holder has a 'known' cash flow, and, unlike a fixed interest security (debt) there is an option to convert to the underlying equity. More common examples include convertible and converting preference shares.

In addition to preferred stock covered above, the most widely used hybrid securities are bonds convertible into common (or, much less often, preferred) stock. Another broad category is so-called capital notes – debt securities with equity-like features attached. The most common examples of capital notes are perpetual debt securities (debt securities with no fixed maturity date), subordinated debt securities, knock-out debt securities, debt with attached warrants and many others.

Why would you want to issue hybrid securities? For exactly the same reason that you would want to issues preferred stock. Or use any other financial instrument, for that matter. Because from financial valuation standpoint (NPV, IRR, etc.) this financing option is better than any other.

This statement you must, of course, prove with the solid financial model and all necessary supporting documentation. It must also prove that your investment project that you are financing with your preferred stock, is financially and economically acceptable.

The bottom line is that there are literally myriads of financing options available on the market for financing your corporate projects. Your job is to get to know all of them well enough to choose the one that best fits your specific project. From financial value generation perspective, of course.