Corporate Hybrid Capital Roundtable 2007
After initially encountering a number of false starts, the European hybrid capital market has become an established and welcome addition to the capital structure for many corporates. While the €6bn of public issuance in 2006 fell slightly short of volumes seen the previous year, many analysts had expected a bumper crop of supply in 2007, consistent with an increase in M&A activity in the second half of last year.
Things got off to an encouraging start in January when a hybrid from Austrian brick-maker Wienerberger met with a very positive response from investors. However, this proved not to be the start of a trend and corporate hybrid issuance volumes are down significantly in the year to date compared to last year.
While sub-prime induced volatility and subsequent widening of credit spreads has played a key role in this of late, there have often been suggestions that the complexity of the structure plus the lack of transparency and certainty in regulatory guidelines have deterred potential issuers.
This includes the differing stance of the rating agencies with regard to their treatment of corporate hybrids – something that continues to puzzle issuers and investors alike. Contrasting views on the subject of legally binding replacement capital covenants from Standard & Poor’s and Fitch have done little to improve transparency in the market, with S&P tightening its standards regarding replacement risks for unregulated issuers’ hybrids with step-ups. Such confusion is bound to have an impact on hybrid issuance in the foreseeable future as issuers and structurers are forced to go back to the drawing board in order to come up with an approach that suits all parties.
Bringing together structurers from some of the top-tier banks in the hybrid arena, IFR’s corporate hybrid roundtable investigated this and other key sector developments. What are the main drivers for corporates selling subordinated debt? What is the potential for hybrid growth in Europe and which so far untapped jurisdictions could play an important role in this development in the future?
Panelists looked at the UK hybrid market following the recent inaugural public transaction for Rexam, discussed whether other UK corporates could benefit from issuing hybrid securities and the outlook for a UK issuer selling hybrid deals in sterling.
The group considering these questions comprised of Geoff Tarrant, global head of hybrid capital at Deutsche Bank, Shazia Azim, head of capital advisory and structuring at Royal Bank of Scotland, Franck Robard, managing director and head of hybrid capital structuring team at SG CIB, Malcolm Cruickshanks, vice president at JP Morgan, Peter Jurdjevic, European head of new products at Citi, and Khalid Krim, head of European hybrid capital at Barclays Capital.
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