Rush to take advantage of hybrid capital

Financial directors are rushing to take advantage of the benefits of hybrid
capital – financial instruments that are a mixture of debt and equity – as they
provide access to capital that is cheaper than equity and more flexible than
normal lending.

Hybrid capital has become increasingly popular in mainland Europe, with the
likes of German healthcare giant Bayer and Danish energy group DONG making
hybrid capital issues in excess of 1bn euros (£692m).

Experts have yet, however, to see a UK company raise funds using such
instruments but it is widely anticipated that it will not be long before UK plc
begins to do so.

In a seminar hosted by PricewaterhouseCoopers, partner Mohammed Amin said
that because hybrid capital was classified as debt for tax purposes, it
attracted tax relief which made it significantly cheaper than equity.

But for credit rating purposes the instrument could be treated as equity if
structured correctly, allowing companies to maintain a very strong credit rating
despite carrying what could be viewed as debt by tax authorities and investors.

‘The cost of capital using a hybrid instrument is incredibly cheap,’ Amin
said. ‘It is usually no more than 1.5% to 2% more expensive than normal debt,
but it is deeply subordinated to normal debt,’ Amin said.

He added that companies issuing hybrid instruments also have the option of
suspending interest payments if necessary, a choice that was not available on
ordinary debt.

‘If a company stops paying interest it has to stop paying dividends and there
are serious reputational risks associated with that, but it can do it. Investors
are taking on the risk,’ Amin said.

As attractive as the instruments are, any finance directors considering a
hybrid security issue need to be aware that regulators are also watching the
development of these new instruments closely.

Earlier this year the National Association of Insurance Commissioners, the
insurance regulator in the US, told insurers who owned a particular hybrid to
treat it entirely as equity.

This saw companies lose the flexibility offered by the hybrid and carry more
risk capital against the investment than was required for debt.



Martin Weigold, chief financial officer of online gambling giant PartyGaming,
has sold his shares in the company along with the company secretary David Abdoo.
Weigold cashed in £3.1m by selling his 2.7 million shares at 116.40p each.
Chairman Michael Jackson ­ also chairman of Sage ­ made £305,048 by selling
262,069 shares, and company secretary Abdoo, raised £1.98m by selling all of his
1.7 million shares.

Michael Jackson, the chairman of Newcastle-based software group Sage, has
cashed in £236,000 after selling shares he held in the company. Jackson sold
100,000 shares at a price of 236p. In its most recent full year results Sage
reported pre-tax profits up 19% on last year at £113.7m.

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