Hybrid Securities are debt securities with traits borrowed from equities

Hybrid securities are securities that have features of both debt and equity.

Wall Street 1929
Wall Street 1929

The classic example of a hybrid instrument is a convertible bond. This is, generally, a corporate bond with a condition attached to it. This condition states that if the equity shares of the corporation issuing the bond hits a certain valuation in the market, the bondholder will be allowed to exchange the bond for a certain number of shares. The number of shares is determined by the bond’s principal value, which is almost always $1000, and how many shares that principal could buy. For a buyer of bonds, this reduces the risk of losing out on exposure to equity if the issuing corporation does very well, without losing the status of a bond, which, as a debt, will be paid back before assets are distributed to non-debt liability holders. For the issuing corporation, usually the bonds hold a slightly lower interest rate than it would otherwise.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.



Subordinated Debt Means Last To Get Paid

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Subordinated debt is like any other debt, borrowed capital, except with one crucial difference. It is debt that gets paid off last if the debtor goes into bankruptcy. For this reason, usually there is a slightly higher interest rate for this type of debt.

Subordinated debt can be issued to avoid bank failure. A bank issues debt, an IOU, that is at least 10 years, and then with the borrowed funds, it pays off debts due in the near future. This is not a ideal situation, but the interest rates tend to be quite attractive. The terms of the loan may also include a clause that allows the bank to pay off the loan in the future after a certain number of months or years, allowing the bank to seek out lower interest rate subordinated debt or other ways of building capital reserves.