Hybrid Securities

Hybrid Securities are securities that have combined features of two or more financial instruments. They are simply called “hybrids”. Hybrid securities have features that are inconsistent with the general features of debt as well as equity securities. Some of their feature resembles to debt where as other resemble to equity.

Hybrid securities are bought and sold in an exchange market and you can buy them through a brokerage firm. Companies issuing hybrids may give investors a fixed or floating rate of return and the return maybe as interest or as dividends.

Each hybrid security type has a unique risk and reward characteristics that are not found in other hybrids. According to the hybrid security and its structure the price of some securities behave more like fixed interest securities whereas others behave more like the underlying shares into which they convert. The hybrids with respect to their type return the face value to the holder when they mature while some other hybrids provide tax advantages.

The three most common Hybrid securities are

• Convertible bonds (debentures)
• Preference Shares
• Warrant

Convertible Debentures

A Convertible Debenture has features of an ordinary debenture but is heavily influenced by the price movements of the stock into which it will convert into. A convertible debenture provides with a fixed income which is generally associated with debentures but can be converted into a stock hence it’s price is highly influenced by the value of the underlying stock.

Preference Shares

Preference Shares carries a fixed rate dividend which is payable after consideration from the directors of a company. They have features of equity in terms of limited voting rights and participation in surplus profits of the company. The feature of fixed income is similar to that of a debenture and the price doesn’t fluctuate much except if it is a convertible preference share.

Warrant

A warrant entitles the holder to buy the underlying stock of the issuing company at a pre-determined fixed price called exercise price until the expiry date. Warrants are used as sweeteners to entice investors or to reduce the interest rates paid to lenders. Warrants are detachable and can be sold independently of the bond or stock.

New types of hybrid securities are being introduced all the time to meet the needs of sophisticated investors who want to have features of both debt and equity. These play a very important role in attracting investors into your company.

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