For financial institutions and real estate investment trusts (REITs), hybrid securities are a familiar tool and a regular component of the capital structure. Corporates have only begun using hybrids since the ratings agencies changed their guidelines, which enabled instruments to be structured that receive significant equity credit and a tax deduction. The corporate market is already established and liquid, but corporates so far have focused on using hybrids to relieve ratings pressure and strengthen their balance sheets. They are not yet proactively optimizing their capital structure with hybrids but we expect this to be a trend in 2007 and beyond, as corporates assess the value of hybrids in reducing equity funding required for acquisitions and in upsizing share repurchases.
We examined the use of funds provided in the documentation of 211 issues in 2005 and 2006.
The Perfect Application: Hybrids and Leveraged Recapitizations - May 2007Adrian Crockett, CFA
Recent corporate finance trends lay the groundwork for a powerful new type of capital structure rebalancing: the hybrid-financed share repurchase. Three notable trends, each individually significant, conjoin to create a uniquely appealing environment for such a restructuring:
Significant growth in the hybrid capital market
Increasing importance of share repurchases
Downward rating migrations toward the Baa/BBB category
We believe that using hybrid capital to finance share repurchases will become a popular mechanism for management to increase shareholder value, and that companies that check most of the boxes below are likely to benefit from using hybrid capital to finance share repurchases.
Thirst for Additional Distributions from Shareholders
Companies that have experienced calls from shareholders to receive larger
distributions
Especially companies that have a lower total shareholder return than the market or their peer group
Equity Relatively Undervalued
Companies with undervalued equity compared to either their peers’ or to
“true” value
The benefits of a share repurchase will be magnified as the unrealized value is transferred to remaining shareholders
Undervaluation will also increase the EPS pickup Investor Perception of Inefficient Balance Sheet
Companies that are perceived to have additional balance sheet capacity and which the market believes could safely operate with higher leverage
Especially companies that have activist shareholders or that may be LBO targets
Limited Capacity Within Target Ratings Constraints
Companies that have limited debt capacity within their targeted rating
(which may be lower than their current rating)
The hybrid instrument’s equity credit will increase the size of share repurchase capacity within the ratings constraints
The key takeaway from this paper is that if your shareholders are tapping you on the shoulder and asking for additional shareholder distributions, but you want to maintain a certain rating, then a hybrid-financed share repurchase may be the answer.
Weighted Average Cost of Capital (WACC) is often used for company valuation and for setting hurdle rates for project planning. With the recent increase in issuance of hybrid securities it is important to have a robust methodology for including hybrid capital in WACC.
Many analysts use a method based on rating agency equity credit. Unfortunately this can lead to misleading results.
In this paper we describe the correct methodology for computing WACC with hybrids, as well as a shortcut method that can be used if the hybrid is used only to repurchase debt or equity or both (rather than being used to fund company projects or acquisitions).
For situations in which the hybrid is being used to repurchase debt or equity or both, we recommend the shortcut method. Otherwise, we recommend the full WACC and Capital Asset Pricing Model (CAPM) approach.
We also note that hybrids reduce the cost of capital in many situations. However, since they typically form only a moderate proportion of a firm's capital structure, expectations of reduction in WACC from hybrid issuance must be kept realistic.
HwA’s team of finance assignment experts would be delighted to help students solve finance assignment and finance homework through quality sample solutions.
http://www.helpwithassignment.com/admin/filemanager/downloads/Corporate%20restructuring-%20finance%20sample%20assignment.pdf
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
The Perfect Application: Hybrids and Leveraged Recapitizations - May 2007Adrian Crockett, CFA
Recent corporate finance trends lay the groundwork for a powerful new type of capital structure rebalancing: the hybrid-financed share repurchase. Three notable trends, each individually significant, conjoin to create a uniquely appealing environment for such a restructuring:
Significant growth in the hybrid capital market
Increasing importance of share repurchases
Downward rating migrations toward the Baa/BBB category
We believe that using hybrid capital to finance share repurchases will become a popular mechanism for management to increase shareholder value, and that companies that check most of the boxes below are likely to benefit from using hybrid capital to finance share repurchases.
Thirst for Additional Distributions from Shareholders
Companies that have experienced calls from shareholders to receive larger
distributions
Especially companies that have a lower total shareholder return than the market or their peer group
Equity Relatively Undervalued
Companies with undervalued equity compared to either their peers’ or to
“true” value
The benefits of a share repurchase will be magnified as the unrealized value is transferred to remaining shareholders
Undervaluation will also increase the EPS pickup Investor Perception of Inefficient Balance Sheet
Companies that are perceived to have additional balance sheet capacity and which the market believes could safely operate with higher leverage
Especially companies that have activist shareholders or that may be LBO targets
Limited Capacity Within Target Ratings Constraints
Companies that have limited debt capacity within their targeted rating
(which may be lower than their current rating)
The hybrid instrument’s equity credit will increase the size of share repurchase capacity within the ratings constraints
The key takeaway from this paper is that if your shareholders are tapping you on the shoulder and asking for additional shareholder distributions, but you want to maintain a certain rating, then a hybrid-financed share repurchase may be the answer.
Weighted Average Cost of Capital (WACC) is often used for company valuation and for setting hurdle rates for project planning. With the recent increase in issuance of hybrid securities it is important to have a robust methodology for including hybrid capital in WACC.
Many analysts use a method based on rating agency equity credit. Unfortunately this can lead to misleading results.
In this paper we describe the correct methodology for computing WACC with hybrids, as well as a shortcut method that can be used if the hybrid is used only to repurchase debt or equity or both (rather than being used to fund company projects or acquisitions).
For situations in which the hybrid is being used to repurchase debt or equity or both, we recommend the shortcut method. Otherwise, we recommend the full WACC and Capital Asset Pricing Model (CAPM) approach.
We also note that hybrids reduce the cost of capital in many situations. However, since they typically form only a moderate proportion of a firm's capital structure, expectations of reduction in WACC from hybrid issuance must be kept realistic.
HwA’s team of finance assignment experts would be delighted to help students solve finance assignment and finance homework through quality sample solutions.
http://www.helpwithassignment.com/admin/filemanager/downloads/Corporate%20restructuring-%20finance%20sample%20assignment.pdf
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
Private equity overview presentation delivered to Drexel University students. Presentation highlights overall private equity market, fund structure, economics, and terms, as well as investment process.
Institutional Investors Heterogeneity And Earnings Management: The R&D Invest...Waqas Tariq
This study examines the association between different institutional investors\' ownership and earnings management practice through R&D expenditures. It investigates this relationship for a sample of 123 US firms. We examine also the effect of institutional ownership on earnings management of firms having different information environment (S&P 500 versus non S&P 500). Results show that while investment funds exacerbate earnings management by encouraging managers to limit R & D expenditures, pension funds and banks follow passive behaviors. Moreover, the hypothesis of the relevance of the environment information in the explanation of the institutional investors’ behavior seems to be important in our case.
In November 2009, we published a white paper on the endowment model of
investing (The Yale Endowment Model of Investing is Not Dead) that argued that the
melt down at certain endowments had nothing to do with purported flaws in
modern portfolio theory. Now that the financial crisis has receded, we thought it
would be instructive to take a fresh look at some of these same endowments to see
what lessons they learned and what, if any, changes they made to the constructions
of their portfolios.
An Empirical Analysis on the Nature of Relationship between Capital Structure...iosrjce
The financing decision with regard to capital structure theory of finance has been a topic of many
theories and their conflicting output for past many years. This paper aims to analyse the nature of relationship
between the capital structure of a firm and its performance. The data of 40 firms excluding financial services
firms listed on Nifty indices on National Stock Exchange is studied (The composition of 50 firms on Nifty
represents a well branch out index reflecting precisely the overall market conditions). Financial services firms
have been excluded from purview of this paper, as they are in the business of collecting money and investing in
financial assets rather than producing goods, hence follow a unique business valuation model. Further financial
services sector being one of the most sensitive sectors. This paper analyzes a period of 13 years (2001-2014)
covering the phases of a business cycle starting from boom (2001/02-2006/07), recession (2007/08-2008/09)
and then recovery (2009/10-2013/14). The complete business cycle will aid to demonstrate the results more
accurately. This paper also surveys the topical developments in the empirical capital structure research. The
data for a period of 13 years is analysed using descriptive statistics, correlation and multiple regression
techniques. For research purpose, the ratios such as debt-equity ratio, debt-asset ratio and long term debt are
taken as independent variables whereas Net Profit, Net Profit Margin, ROCE, ROE and ROA are the ratios
taken as dependent variables.
Private equity overview presentation delivered to Drexel University students. Presentation highlights overall private equity market, fund structure, economics, and terms, as well as investment process.
Institutional Investors Heterogeneity And Earnings Management: The R&D Invest...Waqas Tariq
This study examines the association between different institutional investors\' ownership and earnings management practice through R&D expenditures. It investigates this relationship for a sample of 123 US firms. We examine also the effect of institutional ownership on earnings management of firms having different information environment (S&P 500 versus non S&P 500). Results show that while investment funds exacerbate earnings management by encouraging managers to limit R & D expenditures, pension funds and banks follow passive behaviors. Moreover, the hypothesis of the relevance of the environment information in the explanation of the institutional investors’ behavior seems to be important in our case.
In November 2009, we published a white paper on the endowment model of
investing (The Yale Endowment Model of Investing is Not Dead) that argued that the
melt down at certain endowments had nothing to do with purported flaws in
modern portfolio theory. Now that the financial crisis has receded, we thought it
would be instructive to take a fresh look at some of these same endowments to see
what lessons they learned and what, if any, changes they made to the constructions
of their portfolios.
An Empirical Analysis on the Nature of Relationship between Capital Structure...iosrjce
The financing decision with regard to capital structure theory of finance has been a topic of many
theories and their conflicting output for past many years. This paper aims to analyse the nature of relationship
between the capital structure of a firm and its performance. The data of 40 firms excluding financial services
firms listed on Nifty indices on National Stock Exchange is studied (The composition of 50 firms on Nifty
represents a well branch out index reflecting precisely the overall market conditions). Financial services firms
have been excluded from purview of this paper, as they are in the business of collecting money and investing in
financial assets rather than producing goods, hence follow a unique business valuation model. Further financial
services sector being one of the most sensitive sectors. This paper analyzes a period of 13 years (2001-2014)
covering the phases of a business cycle starting from boom (2001/02-2006/07), recession (2007/08-2008/09)
and then recovery (2009/10-2013/14). The complete business cycle will aid to demonstrate the results more
accurately. This paper also surveys the topical developments in the empirical capital structure research. The
data for a period of 13 years is analysed using descriptive statistics, correlation and multiple regression
techniques. For research purpose, the ratios such as debt-equity ratio, debt-asset ratio and long term debt are
taken as independent variables whereas Net Profit, Net Profit Margin, ROCE, ROE and ROA are the ratios
taken as dependent variables.
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends Newsletter provides a brief digest and commentary of some of the most relevant market trends influencing the fair value regarding private equity portfolio investments.
Mercer Capital's Bank Watch | July 2015 | Small Bank Holding Companies Regula...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Debt and equity are the two important sources of finance for the firms. Basically, capital structure of the firm revolves around the judicious mix of the debt and equity. Upon Debt and equity mix much research has been done and many have designed the capital structure in a very different manner.
Capital structure theory can be said as the manner in which a company or organization finance its economic activities. Basically, capital structure of a firm is the combination of equity and debt. It is a very important decision for every organization or business house. This decision revolves around a question “How to make an optimal capital’s structure for the firm?” and what are the factors that influence the decision. Because the capital structure decision ultimately affects the management, investors and lenders. So, it becomes very crucial for the firms. Earlier many researchers have made investigation on the capital structure determinants but still there are loopholes to be filled up. The theory of Capital Structure began with the phenomenal work made by Modigliani and Miller (1958, 1963). It stirred the academic world to pour more thoughts into that and many interesting works came out.
Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable.
DETERMINANTS OF CAPITAL STRUCTURE:
The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm change over a period of time.
1. Financial Leverage or Trading on Equity: Financial leverage is one of the important considerations in planning the capital structure of a company. One common method of examining the impact of leverage is to analyse the relationship between Earnings Per Share (EPS) and EBIT. The companies with high level of leverage can make profitable use of the high degree of leverage to increase return on the shareholders' equity.
2. Growth and Stability of Sales: The capital structure of a firm is highly influenced by the growth and stability of its sales. If the sales of a firm are expected to remain fairly stable, it can raise a higher level of debt. Stability of sales ensures that the firm will not face any difficulty in meeting its fixed commitments of interest payment and repayments of debt. Similarly, the rate of growth in sales also affects the capital structure decision.
3. Cost o
Capital raising activity is ever-changing. Asset managers are looking for new ways to raise capital and push the boundaries as greater pressure is placed on traditional models.
The desire to increase hold periods, lower the cost of capital, alter and diversify investment strategies, and provide liquidity for investors has caused managers to reprioritize long-term business objectives. Indeed, permanent capital and other specialty finance structures which were once considered non-conventional in the industry have become a common discussion point for asset managers evaluating the strategy of their next fundraising effort.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.
"𝑩𝑬𝑮𝑼𝑵 𝑾𝑰𝑻𝑯 𝑻𝑱 𝑰𝑺 𝑯𝑨𝑳𝑭 𝑫𝑶𝑵𝑬"
𝐓𝐉 𝐂𝐨𝐦𝐬 (𝐓𝐉 𝐂𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬) is a professional event agency that includes experts in the event-organizing market in Vietnam, Korea, and ASEAN countries. We provide unlimited types of events from Music concerts, Fan meetings, and Culture festivals to Corporate events, Internal company events, Golf tournaments, MICE events, and Exhibitions.
𝐓𝐉 𝐂𝐨𝐦𝐬 provides unlimited package services including such as Event organizing, Event planning, Event production, Manpower, PR marketing, Design 2D/3D, VIP protocols, Interpreter agency, etc.
Sports events - Golf competitions/billiards competitions/company sports events: dynamic and challenging
⭐ 𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐝 𝐩𝐫𝐨𝐣𝐞𝐜𝐭𝐬:
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➢ Vietnam Food Expo with Lotte Wellfood
"𝐄𝐯𝐞𝐫𝐲 𝐞𝐯𝐞𝐧𝐭 𝐢𝐬 𝐚 𝐬𝐭𝐨𝐫𝐲, 𝐚 𝐬𝐩𝐞𝐜𝐢𝐚𝐥 𝐣𝐨𝐮𝐫𝐧𝐞𝐲. 𝐖𝐞 𝐚𝐥𝐰𝐚𝐲𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞 𝐭𝐡𝐚𝐭 𝐬𝐡𝐨𝐫𝐭𝐥𝐲 𝐲𝐨𝐮 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐚 𝐩𝐚𝐫𝐭 𝐨𝐟 𝐨𝐮𝐫 𝐬𝐭𝐨𝐫𝐢𝐞𝐬."
Improving profitability for small businessBen Wann
In this comprehensive presentation, we will explore strategies and practical tips for enhancing profitability in small businesses. Tailored to meet the unique challenges faced by small enterprises, this session covers various aspects that directly impact the bottom line. Attendees will learn how to optimize operational efficiency, manage expenses, and increase revenue through innovative marketing and customer engagement techniques.
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3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
Unveiling the Secrets How Does Generative AI Work.pdfSam H
At its core, generative artificial intelligence relies on the concept of generative models, which serve as engines that churn out entirely new data resembling their training data. It is like a sculptor who has studied so many forms found in nature and then uses this knowledge to create sculptures from his imagination that have never been seen before anywhere else. If taken to cyberspace, gans work almost the same way.
The world of search engine optimization (SEO) is buzzing with discussions after Google confirmed that around 2,500 leaked internal documents related to its Search feature are indeed authentic. The revelation has sparked significant concerns within the SEO community. The leaked documents were initially reported by SEO experts Rand Fishkin and Mike King, igniting widespread analysis and discourse. For More Info:- https://news.arihantwebtech.com/search-disrupted-googles-leaked-documents-rock-the-seo-world/
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
What are the main advantages of using HR recruiter services.pdfHumanResourceDimensi1
HR recruiter services offer top talents to companies according to their specific needs. They handle all recruitment tasks from job posting to onboarding and help companies concentrate on their business growth. With their expertise and years of experience, they streamline the hiring process and save time and resources for the company.
Memorandum Of Association Constitution of Company.pptseri bangash
www.seribangash.com
A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
https://seribangash.com/article-of-association-is-legal-doc-of-company/
Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
https://seribangash.com/promotors-is-person-conceived-formation-company/
Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
https://seribangash.com/difference-public-and-private-company-law/
Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
Why Have Companies Been Issuing Hybrids - Jan 2007
1. Strategic Capital Advisory
Hybrid
Capital
Authors
Jamie Ballingall
Strategic Capital Advisory
Merrill Lynch
+1 212 449 8792
jamie_ballingall@ml.com
Adrian Crockett
Head of Strategic Capital Advisory
Merrill Lynch
+1 212 449 9920
adrian_crockett@ml.com
Why Have Companies
Been Issuing Hybrids?
January 2007
10033jan1-IBK Research Report.indd 2 1/24/07 11:18:18 AM
2. i Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Acknowledgments
We would like to thank Kumar Ampapathini and Elliot Wittlin of Merrill Lynch Corporate Finance, as well as Jill
Schildkraut-Katz, Patrick Finn and Michael Cyprys of Merrill Lynch Capital Products Structuring, for their
assistance in preparing the data and their valuable comments. Of course, any remaining errors are our own.
3. Strategic Capital Advisory ii
Why Have Companies Been Issuing Hybrids?
January2007
Executive Summary
For financial institutions and real estate investment trusts (REITs), hybrid
securities are a familiar tool and regular component of the capital structure.
Corporates have only begun using hybrids since the ratings agencies changed
their guidelines, which enabled instruments to be structured that receive
significant equity credit and a tax deduction. The corporate market is already
established and liquid, but corporates so far have focused on using hybrids to
relieve ratings pressure and strengthen their balance sheets. They are not yet
proactively optimizing their capital structure with hybrids but we expect this
to be a trend in 2007 and beyond, as corporates assess the value of hybrids in
reducing equity funding required for acquisitions and in upsizing share
repurchases.
We examined the use of funds provided in the documentation of 211 issues in
2005 and 2006. The chart below provides a breakdown of the uses.
Use of Funds
Financial
Institutions REITs Corporates
Repurchase Debt
General Corporate Purposes
Finance Acquisition
Fund Pension Shortfall
Strengthen Balance Sheet
Repurchase Stock
Invest in Subsidiary
Make General Investments
Pay Dividends to Shareholders
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
4. iii Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Contents
Table of Contents
Overview 1
Use of Funds and Issuance Rationales 3
Financial Institution Use of Hybrid Capital Funds 4
REIT Use of Hybrid Capital Funds 5
Corporate Use of Hybrid Capital Funds 6
So What Does All This Mean? 8
Table of Figures
Figure 1 – Global Hybrid Issuance by Sector, 2005 & 2006 1
Figure 2 – Use of Funds Data Sample 2
Figure 3 – Major Hybrid Capital Issuance Rationales 3
Figure 4 – Mapping of Use of Funds to Underlying Issuance Rationales 3
Figure 5 – Financial Institution Use of Hybrid Capital Funds 4
Figure 6 – REIT Use of Hybrid Capital Funds 5
Figure 7 – Corporate Use of Hybrid Capital Funds 6
Figure 8 – Use of Hybrid Capital Funds for USA and Europe 7
5. Strategic Capital Advisory 1
Why Have Companies Been Issuing Hybrids?
January2007
Overview
In past few years we have seen a dramatic increase in the size of the hybrid
capital market. Initially, issuance was largely by financial institutions and driven
by regulatory capital considerations. However, the last two years have seen a
notable pick-up in the use of hybrids by corporates, with approximately $11.5bn
of global corporate hybrid issuance in 2005 and $16.8bn in 2006.1
Figure 1 – Global Hybrid Issuance by Sector, 2005 & 2006
0
10
20
30
40
50
HybridIssuance($bn)
Financial Institutions REITs Corporates
Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006
0
10
20
30
40
50
HybridIssuance($bn)
Financial Institutions REITs Corporates
Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
In general, we consider a hybrid security to be an instrument with equity-like
and debt-like features, such as Merrill Lynch's Income Capital Obligation
NotesSM (ICONs)2 or preferred stock (whether issued directly or through a
special purpose vehicle). Typically a hybrid has the following features:
Long maturity or perpetual
Subordinated to debt but senior to equity
Deferrable or non-cumulative payments
Replacement language
Note that this definition excludes convertible bonds.
Our forthcoming paper3 provides a list of the theoretical and practical benefits of
hybrid issuance and an overview of the circumstances in which issuing a hybrid
is an attractive option for corporates. This paper examines the use of proceeds
stated in issuance documentation for financial institutions, REITS and corporates
over the last two years and, for corporates, compares them to the reasons listed
in our forthcoming paper.
1 All currency amounts in this paper refer to U.S. Dollars (USD). Other currency amounts were converted to USD at the
prevailing market rate at the end of 2006.
2 "Income Capital Obligation Notes" is a service mark of Merrill Lynch & Co., Inc.
3 Why Should Corporates Issue Hybrids?
6. 2 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Figure 2 provides a breakdown of the issues included in the analysis.
Note that not all the issues that took place in 2005 and 2006 provided use of
funds information and they are excluded from the table below.
Figure 2 – Use of Funds Data Sample
Sector Region Period
No. of
Issues
Issuance
Volume
$ bn
Financial Institutions USA4 2005 & 2006 113 60.2
REITs Global 2005 & 2006 56 6.8
Corporates Global 2005 & 2006 42 25.0
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
4 Includes Bermuda based insurance and reinsurance issuers.
7. Strategic Capital Advisory 3
Why Have Companies Been Issuing Hybrids?
January2007
Use of Funds and Issuance Rationales
Our extensive discussions with issuers led us to compile a list of issuance
rationales, some of which are appropriate only for certain types of issuer. A
comprehensive discussion of these rationales as they apply to corporates will be
contained in our forthcoming paper.5
Figure 3 – Major Hybrid Capital Issuance Rationales
Financial
Institutions
Real Estate
Investment
Trusts
(REITs) Corporates
Provide Regulatory Capital
Relieve Ratings Pressure
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Substitute for Equity
Diversify Funding Sources
Relieve Accounting Ratio Pressure
It is not possible to observe directly what caused an issuer to choose hybrid
capital, but it is possible to collate the “Use of Funds” from the documentation of
each issue. We can then map the reported use of funds to underlying issuance
rationales according to the diagram below.6
Figure 4 – Mapping of Use of Funds to Underlying Issuance Rationales
Strengthen Balance Sheet
Repurchase Debt
Repurchase Stock
Finance Acquisition
Fund Pension Shortfall
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Relieve Ratings Pressure7
Strengthen Balance Sheet
Repurchase Debt
Repurchase Stock
Finance Acquisition
Fund Pension Shortfall
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Relieve Ratings Pressure7
5 Why Should Corporates Issue Hybrids?
6 We were unable to map the use of funds General Corporate Purposes, Make General Investments, Invest in Subsidiary and
Pay Dividends to Shareholders cleanly to an underlying rationale. Similarly, none of the uses of funds gave any insight into
the underlying rationales of: Substitute for Equity, Provide Regulatory Capital, Diversify Funding Sources or Relieve
Accounting Ratio Pressure.
7 In this paper we intend Relieve Ratings Pressure to include unrated entities that are seeking to mitigate covenant constraints
on loans or private placements.
8. 4 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Financial Institution Use of Hybrid Capital
Funds
We examined each of the 113 financial institution hybrid issues, representing
$60.2bn of capital, which occurred in the USA between January 2005 and
December 2006 inclusive and tabulated the use of funds. In many cases an issue
had more than one use of funds, in which case each use was given proportional
credit.8 For example, if a one billion dollar issue had uses “General Corporate
Purposes” and “Repurchase Debt” then $500 million was counted as General
Corporate Purposes and $500 million as Repurchase Debt.
Figure 5 – Financial Institution Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
General Corporate Purposes 40.1 73
Repurchase Debt 6.1 12
Finance Acquisition 5.6 12
Repurchase Stock 5.4 10
Invest in Subsidiary 1.5 2
Make General Investments 1.3 4
Pay Dividends to Shareholders 0.3 1
Strengthen Balance Sheet - -
Fund Pension Shortfall - -
Total $60.2bn 113
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
General Corporate Purposes9 is the clearly dominant reason. We interpret this to
mean that hybrids have become a regular source of capital for many financial
institutions. Discussions with issuers indicate that this adoption has been driven
by the treatment of hybrids as regulatory capital.
The other three significant uses of funds are Repurchase Debt, Finance Acquisition
and Repurchase Stock. Interestingly, Repurchase Debt and Repurchase Stock both
represent a proactive rebalancing of capital structure.
8 The same method is applied for analysis of REITs and corporates. This proportional approach, combined with rounding, means
that some columns in the figures may not reconcile with the totals on a one decimal place basis.
9 Many US bank-holding companies have been issuing hybrids to refinance callable traditional Tier 1 trust preferreds at more
attractive prices and with upgraded rating agency benefits. We believe these transactions are being reported as General
Corporate Purposes in documentation.
9. Strategic Capital Advisory 5
Why Have Companies Been Issuing Hybrids?
January2007
REIT Use of Hybrid Capital Funds
In 2005 and 2006, there were 56 hybrid issues by REITs representing $6.8bn of
capital raised.
Figure 6 – REIT Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
Repurchase Debt 3.3 26
General Corporate Purposes 2.3 16
Make General Investments 0.7 5
Finance Acquisition 0.6 8
Repurchase Stock - -
Invest in Subsidiary - -
Pay Dividends to Shareholders - -
Strengthen Balance Sheet - -
Fund Pension Shortfall - -
Total $6.8bn 56
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
For three of the four significant uses, Repurchase Debt, Make General Investments
and Finance Acquisition, hybrids can be seen as an alternative to debt.
10. 6 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Corporate Use of Hybrid Capital Funds
The use of hybrid capital for corporates lagged that of financial institutions.
Financial institutions always had a strong rationale in regulatory capital, but
corporates lacked this major driving factor until recent developments in rating
agency equity credit created an impetus for tax deductible corporate issuance.
Over the last two years there have been approximately 42 corporate hybrid deals
globally and our examination of these deals outlined the following uses of funds.
Figure 7 – Corporate Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
Repurchase Debt 8.9 16
General Corporate Purposes 8.4 15
Finance Acquisition 3.5 5
Fund Pension Shortfall 1.7 1
Strengthen Balance Sheet 1.5 2
Repurchase Stock 0.8 2
Invest in Subsidiary 0.1 0
Make General Investments 0.0 1
Pay Dividends to Shareholders - -
Total $25.0bn 42
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
While the generic rationale General Corporate Purposes still scores highly, it is
interesting to note that Repurchase Debt is the highest scoring rationale. Its
position is supported by two related rationales: Strengthen Balance Sheet and Fund
Pension Shortfall. All three of these show hybrids being used as a mechanism to
deleverage. Finance Acquisition appears as the third choice.
We interpret these results to mean that relieving ratings pressure, either caused
by an acquisition or otherwise, is the dominant rationale for hybrid issuance for
corporates. This conclusion is supported by the low score of Repurchase Stock.10
Proactive capital structure management would likely yield issues with both
Repurchase Debt and Repurchase Stock as uses of funds. We observed no such
issues in our sample.
Certain markets – for instance, Australia and Europe – were early adopters of
corporate hybrids, while markets that are generally considered more financially
sophisticated such as the USA have lagged behind in embracing this new
technology. Given these fundamental differences we then examined the rationale
based on a geographic split.11
10 The number of corporates that identified Repurchase Stock as the major use of proceeds could be impacted by tax legislation in
some jurisdictions, which may limit the ability of a firm to claim interest deductions on debt or quasi debt where it has been
used to finance a share repurchase.
11 Insufficient data was available for Asia to conduct meaningful analysis.
11. Strategic Capital Advisory 7
Why Have Companies Been Issuing Hybrids?
January2007
Figure 8 – Use of Hybrid Capital Funds for USA and Europe
USA
OtherRepurchase
Stock
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt43%
34%
8%
13%
2%
OtherRepurchase
Stock
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt43%
34%
8%
13%
2%
Europe
Strengthen
Balance Sheet
Fund Pension
Shortfall
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt
31%
34%
17%
9%
9%
Strengthen
Balance Sheet
Fund Pension
Shortfall
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt
31%
34%
17%
9%
9%
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
Although there are some differences between the markets, the three major global
uses of proceeds (Repurchase Debt, General Corporate Purposes and Finance
Acquisition) still dominate. As the number of corporate issues increases we expect
the range of uses of funds to broaden.
12. 8 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
So What Does All This Mean?
For financial institutions and real estate investment trusts (REITs), hybrid
securities are a familiar tool and regular component of the capital structure.
Corporates have only begun using hybrids since the ratings agencies changed
their guidelines, which enabled instruments to be structured that receive
significant equity credit and a tax deduction. The corporate market is already
established and liquid, but corporates so far have focused on using hybrids to
relieve ratings pressure and strengthen their balance sheets. They are not yet
proactively optimizing their capital structure with hybrids but we expect this to
be a trend in 2007 and beyond, as corporates assess the value of hybrids in
reducing equity funding required for acquisitions and in upsizing share
repurchases.
13. Strategic Capital Advisory 9
Why Have Companies Been Issuing Hybrids?
January2007
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