Examining the structure of corporate hybrid bonds and the stock market reaction to their announcement in Finland

Abstract

Objectives Hybrid bonds are a product that combines features of both equity financing and debt financing including tax deductibility of interest, coupon deferral and equity credit. The impact of a hybrid bond issue on share price has not been researched in the past in academia. The first objective of this research is to identify how Finnish hybrid bonds are structured and how they compare to other European hybrid bonds. The second objective is to identify whether a relationship between a hybrid bond issue announcement and share performance exists. The last objective is to understand what factors correlate with the market reactions to announcements. Summary This study reviewed academic literature and conducted an interview of a debt capital markets professional. This study looks at 36 publicly listed Finnish hybrid bond issues made during the 2008 - 2018 time period and examines the performance of the underlying companies’ shares around the announcement date of each issue. Conclusions Finnish hybrid bonds have a few notable differences including that they tend to have perpetual maturities, earlier first call dates, higher coupon step-ups, absence of replacement language and lower regard for credit rating agency equity credit compared to commonly issued hybrid bonds in other European countries. A negative stock market reaction of -0.6% on average exists that is statistically significant and in line with academic research regarding similar securities in other markets. The market reaction to a hybrid bond announcement seems to be negatively correlated with the coupon-% and have no correlation with bankruptcy risk (Altman Z-score) and effective maturity, although, the regressions were not statistically significant.