Sanlam UK’s Hybrid Capital Solution: everything you wanted to know but were afraid to ask.
by Peter Doherty, Head of Fixed Income at Sanlam Investments UK and manager of the Sanlam Hybrid Capital Bond Fund.
Hybrid capital is a form of capital that sits below senior debt and above common equity; in other words, it is literally a hybrid fixed interest instrument. These type of instruments are typically issued by large, well-capitalized investment-grade companies.
The size of the global hybrid capital market is over US$ 1.2 trillion and is a key vehicle for the world’s leading banks, insurance companies, asset managers and corporations.
Why would investors choose a hybrid capital investment?
- Yields are higher than senior debt, often considerably so
- The high quality of the issuing companies means default rates are lower than in traditional high yield
- Non-payment/non-repayment is relatively unusual.
- Hybrid capital can be managed within an ESG framework. In our own ESG strategy, we apply a rigorous and transparent screening sustainability process.
Why do companies issue hybrid capital?
- Regulators and ratings agencies give equity credit on the balance sheet of the issuer. This is because under certain conditions, issuers may skip or defer payment, or write down the principal value.
- Coupon payments are classed as interest and are tax-deductible, which provides low after-tax cost of equity.
Watch our explanatory video featuring Peter Doherty, Head of Fixed Income at Sanlam Investments UK, below.