Introduction to Hybrid Instruments

Duration of Course: Three days

Overview

Hybrid instruments are a financial instrument that are classified between debt and equity and are used predominantly by banks to help them to comply with the demanding Basel 2 requirements as well as for tax and accounting reasons. The different classes of capital are considered i.e. Core capital, Tier One, Upper Tier 2 and Lower Tier 2 and Tier 3. The instruments are often built with a lot of flexibility i.e. temporarily suspending interest. This course will examine the building blocks of hybrid instruments and their use for tax planning as well as regulatory requirements.  The European accounting standards are also discussed.  As a result of the recent credit crunch, banks are under pressure to raise capital without unnecessary dilution of existing shareholders - hybrid instruments are therefore one of a number of options that banks will consider and are therefore expected to grow in importance.

Delegates will see how bonds are constructed and the arbitrage opportunities that they offer for banks in terms of accounting and regulatory treatment.

Course Objectives

The course will appeal to accountants, loan originators, regulators and traders; emphasis will be placed on:

• Types of Hybrid Instruments currently used
• Regulatory Perspective
• Relevant Accounting Rules
• Credit Rating Agency approach

Course Content

What is a Hybrid Instrument

• Hybrid Instruments Defined
• Construction  of Instruments
• Benefits/Limitations
• Uses
• Benefits to Issuer/Investor

Case Study: Debt v Equity Financing

Basel 2 Rules

• Core Capital
• Basel Tier One Capital Defined
• Tier Two Capital upper/lower
• Tier Three Capital
• Market, Credit, Operational and Liquidity Risk

Accounting Requirements

• IAS 32 Liabilities v Debt Defined
• Convertible Bonds
• IAS 39 Financial Instruments
• IFRS 7 Disclosure Requirements
• Credit Spread
• First to Default and Loss given Default

Tax Implications

• Interest deduction and dividend payments
• Tax features of different jurisdictions
• Stamp duty
• Payment in Kind and Tax Deferral
• General and Limited Partnerships

  Case Study: HBOS Hybrid Issue

Credit Rating Agencies

• Role of the credit rating agency
• Rating Process
• Limitations of Rating Process
• Conflicts of Interest

Issuing Hybrids

• Term Structure
• Issuing Vehicles
• General v Limited Partnership
• Legal and Accounting Issues

Gearing & Leverage

• Gearing & Leverage Measures
• Value at Risk
• Legal Constraints on Leverage
• Reporting Requirements

Other Hybrid Instruments 1

• Convertible Bonds
• Debt v Equity Features
• Accounting Treatment
• Regulatory Issues

Other Hybrid Instruments 2

• Inverse Floaters
• First to Default Notes
• Put/Call Option Bonds
• Redeemable Bonds

Case Study: Construction of Inverse Floater Instrument

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