Hybrid capital

Capital incorporating elements from both debt and equity capital. Hybrid capital instruments are subordinated to other debt instruments or, in the extreme case, even senior only to common equity. These struments are generally either long dated or perpetual and have pre-defined deferral mechanisms to suspend interest payments. For issuers, fixed-income hybrids allow raising "risk capital" without having to issue equity and thereby diluting existing shareholders. A further advantage is that the coupon paid on hybrid capital instruments is considerably lower than the cost of equity. Tax deductibility of the interest paid on hybrid instruments further increases the attractiveness of this kind of capital. At times they also offer favorable regulatory and or accounting treatment. They can reduce gearing.
Depending on the structural features embedded in the security, financial regulators and rating agencies categorize the instrument as being more debt-like or more equity-like with a corresponding equity credit to risk capital and solvency calculations.
The pecularities of these instruments and the lesser liquidity are less attractive than ordinary bonds to fixed income investors resulting in spreads over conventional debt. Hybrid securities from financial institutions frequently have smaller spreads relative to similar securities from corporates as the former are subject to regulatory supervision, more oriented to retaining ratings and reputation. Moreover these securities carry standardised covenants. Similarly documents are often more standardised.