Issuance of corporate hybrid bonds, which blend features of debt and equity, is on the rise in the Nordics. The simple structure for raising equity capital appeals to corporates, while the higher yields drive strong investor demand.
Equity capital at a reasonable cost via a simple process. That winning formula is gaining popularity among Nordic corporates in the form of hybrid bonds.
These bond-like securities, which combine the characteristics of both debt and equity, can be used by companies in a range of situations, for example to build growth capacity or support credit metrics. And the product’s higher yields appeal to investors in today’s ultra-low interest rate environment.
“Hybrid bonds have cemented their role in the corporate toolbox”, says Antti Saha, Head of Debt Capital Markets at Nordea.
Issuers can include hybrid bonds as equity in their International Financial Reporting Standards (IFRS) accounting, provided they meet certain conditions, Saha explains. The instrument should not include a contractual obligation for the issuer to repay the nominal value of the bond, and all payments under the instrument should be at the issuer’s discretion, as with dividends. Thus, hybrid bonds are typically structured as perpetual, or very long-dated, instruments, with coupon payments being deferrable by the company.
The first corporate hybrids in the Nordic region were issued in 2005, and unrated Nordic corporates have tapped the hybrid market since 2008.
“We’ve had more than a decade with the product already, and activity is definitely on the rise”, says Saha.
Telia Company, for example, recently became the first Swedish corporate to bring a Green Eurobond hybrid to the market. Find out more about Telia’s hybrid bond issuance.
Hybrid bonds have cemented their role in the corporate toolbox.
Antti Saha, Head of Debt Capital Markets, Nordea
The hybrid bond structure
Hybrid bonds are issued by both rated and unrated corporates in different sizes and currencies. Rating agencies apply their own specific criteria for hybrids bonds. The most common structure allows for 50 percent of the nominal value to count as equity in the metrics that rating agencies use for their credit analysis. Among unrated issuers, the structures are more flexible.
Typically, the key commercial components of hybrid bonds include a call option combined with a coupon step-up incentivising an early redemption of the bond at the time of the call. With unrated transactions, the period to the first call and the level of coupon step-up can be tailored, while rated deals are highly standardised to meet rating agencies’ criteria.
When it comes to execution, the hybrid bond process is similar to that for a conventional senior bond.
A new layer of capital
Given the simple nature of the instrument and the strong investor demand, issuance of corporate hybrids has soared.
“Interest in hybrids among Swedish corporates has grown significantly over the past two years”, says Niklas Ekman, who oversees Nordea’s high yield origination in Sweden.
“Hybrids have added a new capital layer, especially for many real estate companies, but also for other sectors. And they have to a large extent replaced preference shares”, Ekman adds.
The rise in hybrid bond issuance is evident when looking at issuance volumes. In 2019, Nordea helped Nordic corporates issue an equivalent of EUR 2.94 billion of hybrid capital via 15 different transactions, up from EUR 1.10 billion in 2018.
Nordic Hybrid Bond Issuance 2011-2019:
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