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Hybrid Equity-Linked Capital

Debt + Warrants
Conventional loan with detachable warrants
Convertible Bonds
Debt converting / exchanging to an underlying asset
Equity-Linked Note
Loan instruments with performance tied to equity
Debt + Warrants
Conventional loan with detachable warrants
Convertible Prefs
Equity instrument with fixed dividend and conversion rights
Stock + Warrant
Equity raise with deferred dilution and monetized vol

Debt Hybrids

Equity Hybrids

What is Hybrid Capital?

At its core, Hybrid Capital covers all instruments that blend two or more elements of the capital structure – they are, in effect, a combination of a capital instrument and some type of optionality defining the equity link*.

CAPITAL INSTRUMENT

EQUITY LINK / OPTION

Hybrid Capital Instruments

CBs = Issuer Bond + Call Option on Issuer Stock

EBs = Issuer Bond + Call Option on different Stock

CoCo (write-down) = Bond – Digital Put

Coco (Equity) = Bond – Barrier Put

ASCOTs = Call Option on a CB (Bond + Call)

PIPE Structures = Debt + Warrant  /  Stock + Warrant etc...

*The reality nowadays is the complexity of T&Cs in the instruments make it hard to separate the two, but many practitioners still separate to collapse mis-pricings across asset classes & instruments.  

Why Companies Issue It?

WHY COMPANIES ISSUE

ADVANTAGES OVER EQUITY

ADVANTAGES OVER DEBT

Growth capital with deferred dilution - tech, biotech, AI etc... companies with compelling equity stories but less certain near-term cash flows

Refinancing existing debt at a lower cost (potentially 200bps - 500bps saved annually

Bridge financing to a permanent capital event (IPO, strategic sale, larger fundraising)

M&A acquisition funding, de-leveraging & restructuring

Share buyback funding - managing dilution whilst returning capital to shareholders
Deferred dilution - only if stock rises beyond a specified level

Sell equity higher - only issuing at the conversion premium

Smaller market impact - seen as a stronger message and smoother liquidity transition

No / less immediate ownership loss

Faster execution times
Cheaper - generally much lower coupon than Snr Secured and other straight / bank debt

No onerous financial covenants

No credit rating requirements

Potentially favourable accounting treatment
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