Home > Accounting and Tax Guide
Explaining "Hybrid Debt"
Hybrid debt is used by investors to describe securities that flow back and forth between debt and equity. It is not actually any form of debt at all, it is just a preferred investment instrument used by investors to help businesses expand and grow. (If you are taking any business intelligence courses, this may be discusses in the financial section of the teaching.)
Hybrid debt, like any other debt, is used by businesses when investors invest in the business. Businesses use these types of instruments to secure loans they need for certain projects they are to undertake. The interesting thing is that this type of investment can be used, as convertible bonds, to create equity. The investors are given a chance to turn these convertible bonds into stocks, which they can then sell for equity. This is a certain type of hybrid debt, which businesses incur to begin new undertakings.
Preferred stocks are another form of this debt, in which investors take no ownership of the company, but are paid a fixed dividend amount quarterly for their initial investment. This fixed amount may vary according to the current value of the company's stock.
This type of bond investment works well for investors, because it gives them extra chances to earn capital on their investment. If investors wait until the right time to convert their bonds into stocks, as with convertible bonds, then they get more shares for their money. If the value of the stock increases, they can sell these shares and make more money this way. With preferred stock, it is less risky of an investment because those investors who own the stock are paid first and foremost if the company is to fail. This way it ensures the investor that they will receive some capital or return on their investment even if the company goes under.
The thing about hybrid debt is that it is often a more rare form of investment than buying normal stocks. Due to this limited availability, companies who sell these bonds often charge a higher rate than they would for normal shares because of the limited availability of these shares. It is a solid investment, with less risk than buying normal stocks, but often times it may cost a little more on the initial investment. Also, as with a convertible bond, investors must be wary, not to convert the stock at the wrong time or they will actually lose money.
Know that this type of debt is not debt at all; it is just the same thing as buying shares of a company, with less risk. As with any investment there is some risk. That's why the preferred stock method may be used when the company's future is looking grim. Good investors know which one of these two options is most viable for a certain company, and doing market research is vitally important in maintaining a healthy and abundant portfolio. You need to keep up with each company's reports if you have chosen this route. Knowing when to convert your bonds into stocks and equity is vital to success with this venture. Companies need money for investments and these types of bonds. Although sometimes rare, this method works in favor of both the investor and the company that are both looking to make a new move into the future.