The recent offerings by TransCanada Trust and Emera Incorporated
of U.S. $1.2 billion of hybrid debt (Hybrid) have created
particular interest in this type of financing. Hybrids are
noteworthy for several reasons, including:
Hybrids have been around for many
years and were originally popular with banks and insurance
companies. Regulatory changes arising from the financial crisis of
2008 and other factors have curtailed the use of Hybrids in the
financial sector. However, Hybrids remain attractive for many types
The Hybrid qualifies for Basket
"C" equity treatment by Moody's Investor Service,
Inc. and for "Intermediate Equity Credit" by Standard
& Poor's Ratings Services, meaning the principal amount of
the Hybrid qualifies as 50% equity and 50% debt for credit rating
calculations. Therefore, Hybrids are especially attractive to
issuers seeking to maintain their investment grade rating.
Although the Hybrid is treated as
partial equity credit with rating agencies, it is treated as debt
for Canadian income tax purposes, with the result that interest
payable on the Hybrid is deductible by the issuer for tax
Hybrids are a cost-effective means of
raising capital. The after-tax cost of capital as a result of
issuing a Hybrid is generally less than the aggregate cost of
capital if a corporation issued the same amount as 50% debt and 50%
Although the rating agencies place
certain limitations on the amount of Hybrids that any corporation
can issue, it is to a corporation's advantage to maximize the
use of Hybrids.
The ideal candidates for Hybrids are corporations with an
investment grade rating and a constant need for capital or the need
to finance a significant acquisition transaction or project.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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