Hybrid Financing

Main sources of financing:

‡ Preference capital, ‡Warrants, ‡Convertible debentures & ‡Innovative hybrids.


Hybrid Financing


9/15/2010 Hybrid Financing 3 . Features of Warrant & Convertible Debentures. Innovative Hybrids. Valuation of compulsorily Convertible Debentures. Motive for issuing Warrants.Topics for discussion: discussion:      Preference Capital.

Features of Debentures. Hybrid Financing 4 9/15/2010 . Innovative hybrids.HYBRID FINANCING: FINANCING:   Preference Capital. Valuation of debentures. Warrant & Convertible convertible  compulsorily   Motive for issuing warrants.

they enjoy a higher priority than equity shareholders.  The claim of preference shareholders lies somewhere between that of debenture (or other lenders) holders on the one hand & equity shareholders on the other. While they have a lower priority than debenture holder. Hybrid Financing 5  9/15/2010 .PREFERENCE CAPITAL: CAPITAL:  It¶s a hybrid source of financing that partake some characteristics of equity & some attributes of debt.

3. 4. Redeemability. Callability. 6. 5. 9/15/2010 Hybrid Financing 6 . 2. Participation of surplus profit & asset. Cumulation of dividends.PREFERENCE CAPITAL: CAPITAL: FEATURES OF PREFERENCE SHARES: 1. Convertibility. Voting rights.

7 9/15/2010 Hybrid Financing . of compulsorily convertible   Motive for issuing warrants. Innovative hybrids. Valuation debentures. Features of Warrant & Convertible Debentures.HYBRID FINANCING    Preference Capital.

to subscribed to certain number of equity shares at a stated price during a specific period. but not the obligation.FEATURES OF WARRANT & CONVERTIBLE DEBEBTURES: Features of warrants A warrants gives its holder the right. 9/15/2010 Hybrid Financing 8 . Warrants are generally issued to sweeten debt issue.

2. CCD which provide for conversion within 18 month. OCD which provide for conversion within 36 month. 3.  Types of Convertible debentures as per SEBI guidelines. 1. Hybrid Financing 9 9/15/2010 .FEATURES OF WARRANT & CONVERTIBLE DEBEBTURES:  Features of Convertible debentures: A convertible debentures is a debenture that is convertible partly or fully in to equity shares. Debentures which provide for conversion after 36 month but which carry ³call´ & ³put´ feature.

Valuation of debentures. Innovative hybrids. Features of Debentures.HYBRID FINANCING   Preference Capital. Hybrid Financing 10 9/15/2010 . Warrant & Convertible convertible  compulsorily   Motive for issuing warrants.

VALUATION OF DEBENTURES: DEBENTURES:  COMPULSORILY CONVERTIBLE Value: The holder of a partly convertible debenture receives: 1. and Principal repayment relating to the unconverted amount. 3. Equity shares on part conversion. Receives interest at a certain rate over the life of the debenture. 2.  Cost: 9/15/2010 Hybrid Financing 11 .

Valuation of debentures. Innovative hybrids.HYBRID FINANCING   Preference Capital. Warrant & Convertible convertible  compulsorily   Motive for issuing warrants. Features of Debentures. Hybrid Financing 12 9/15/2010 .

They provides companies an opportunity to issue equity shares in future at a premium over the current price. They allow companies to issue debt cheaply. 2.  With closer observations these explanations seems as a µFree launch¶ flavour & do not appear.Motive for issuing warrants:  Surveys of finance executives have given two popular motive known as µconventional explanation¶: conventional explanation 1. 9/15/2010 Hybrid Financing 13 .

It says that these instruments: 1.  Improve cash flow matching Generate Financial synergy & Mitigate agency cost. 2. 3.Motive for issuing warrants: Modern finance explanations: It offers better explanations for the popularity of convertible debentures & debentures with warrants. Hybrid Financing 14 9/15/2010 .

Features of Debentures. Warrant & Convertible convertible  compulsorily   Motive for issuing warrants. Innovative hybrids.HYBRID FINANCING   Preference Capital. Valuation of debentures. Hybrid Financing 15 9/15/2010 .

exchange rate or commodity index.Innovative Hybrid: Hybrid:  It¶s a hybrid security whose payoff is linked to some general economic variables like the interest rates.  9/15/2010 Hybrid Financing 16 . The most common form is µconvertible bond¶.

They may offer a µplay¶ which is not available otherwise. in this sense they help the market become mere complete. 9/15/2010 .Innovative Hybrid: Hybrid: In popularity of hybrids there may be two economic reasons: 1. They may provide a tax or regulatory advantage. Hybrid Financing 17 2.

2. Hybrid to manage foreign exchange risk: Dual currency bond in 1985 Philip Morris Credit issued a dual currency bond. Standard oil issued an oil-index note which combined a zero coupon bond with a call option on oil with the same maturity. the coupon payments of which were to be made in Swiss franc where is the principal is to be paid in US dollars. 9/15/2010 Hybrid Financing 18 . Some risk.Innovative Hybrid: Hybrid: Hybrids are essentially devices for managing risk. examples are: are: Hybrids to manage commodity risk: Oil index bond in 1986. 1.

and (ii) a plain vanilla interest rate swap for twice the principal of the loan. It could be decomposed into two parts. bullet repayment note. 9/15/2010 Hybrid Financing 19 .Innovative Hybrid: Hybrid: 3 Hybrid to manage interest rate risk: Inverse flouting rate note in 1986 by The Student Loan Market Association. rating sensitive note in 1988. by Manufacturer Hanover in which it agreed to pay a spread above LIBOR which increased decline with debt rating. Hybrid to reduce conflicts between bondholders & stockholders: Floating rate. 4. (i) a floating rate.

THANKS 9/15/2010 Hybrid Financing 20 .

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