Hybrid Financing and Various Such Instruments

Hybrid financing instruments are those sources of finance which possess characteristics of both equity and debt. Some well-known hybrid financing instruments are preference shares, convertible debentures, warrants, options etc.

Preference Shares

A preference share is also a long-term source of equity finance. It is commonly known as hybrid financing instrument because it shares certain characteristics of debt also.

Like debt has fixed interest rate, preference shares have fixed dividend and they also have a preference of payment at the time of liquidation just as debt holders get. They do not have any say in the management in the form of voting rights also do not have any share in the residual profits also.

Certain attributes of preference shares resemble the equity shares.

Hybrid Financing Instruments

The preference dividend is also paid out of net profits after taxes but the only difference is that the dividend is fixed. In the weak financial situations, management may consider not paying the dividend to preference shareholders. If the shares are cumulative preference shares, the said dividend may be postponed but will have to pay if the next year financials are good. A specific type of preference share i.e. irredeemable preference share does not have a certain maturity also.

Convertible Debentures

These are a different type of debentures which are also categorized as hybrid financing. In addition to the normal debenture features, these debentures have the option to convert the debenture into equity on certain terms and conditions.

These debenture holders enjoy the regular income of interest till the time they exercise their right or the option of converting it into equity shares.

Warrants

Similar to debentures, warrants also have the right to purchase equity shares of a company. Warrants are not a debenture or equity till the time they are exercised and equity is purchased. They are just a right or option to purchase equity which the holder has.

Options

There are debt instruments which accompany options that may be either call or put. These options convert the debt into equity. This kind of instruments remains debt at the time of issue until the time they are exercised. The post they are exercised, they become equity. A call option allows the holder of the option to buy something at a certain price and on or before a certain date whereas put option allows selling.

Last updated on : March 10th, 2018
What’s your view on this? Share it in comments below.

Leave a Reply

Types of Letter of Credit (LC)
  • Terms of Factoring
    Terms of Factoring
  • Floating Rate Bonds
    Floating Rate Bonds
  • Equipment Leasing Companies
  • Gross Lease
    Gross Lease
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook


    Related pages


    interpretation of inventory turnover ratiowho is a debenture holderstale bill of ladingwhat is an example of a vertical mergerdebits and credits rulesmodigliani theorydifference between credit and debit in accountingadvantages and disadvantages of stakeholder theorylc transactionfinance lease or contract hiredefine debentures in accountingdefine asset turnover ratiowhat is wacc and why is it importantratios to analyze financial statementsdifference between revocable and irrevocable letter of creditpayback calculation exampleaccounts payable meaning with examplemacroenvironmental factorsstockholders equity ratiowealth maximization and profit maximizationdebt payback periodtrade receivables collection period formulastock turnover ratio formula in dayswhat is non recourse factoringcapm costdividend policy theorieseps advantages and disadvantagesmethod of evaluating capital investment proposalsgoodwill definition ifrsdebenture loansinvestment apraisalnon competitive benchmarkingwealthy meaning in hindiroe ratio formulawhat is preferential sharesadvantages of invoice discountingcollection period ratio formulasecured debenture definitionpurpose of profitability ratioswacc curveredeemable debenturesadvantages and disadvantages of an interpreterdifference between sanction and approvalstock turnover ratio formula examplecredits and debits for dummiessimilarities between cost accounting and management accountingloans advantages and disadvantagesgoal of profit maximizationcapital investment appraisal methodsconstant growth rate formulazero payout policybreak even analysis advantages and disadvantagesdiscounted cash flow advantages and disadvantagesinvestopedia budgetresidual dividend model exampleeoq limitationsresidual dividend policy advantages disadvantagescash payback methodwhat is capital rationingcapital budgeting ratioslessee lessor definitionwhat is zero based budgeting definitionwhat does it mean to capitalize interestfeatures of debentureshow to comment on profitability ratiosexamples of variable costs in manufacturingprofitability ratios meaningpreference shares fixed dividendhow to solve for irradvantages and disadvantages of cash managementcash flow and fund flownatures inventorydifference between profit and wealth maximizationconfirming bank in letter of credit