April 1, 2006
Agusto UrmenetaWhat is a hybrid security?It is a combination of a debt and equity instrument. The regulators and rating agencies Moody's Investors Service and Standard & Poor's treat them as equity instruments, but issuers and investors achieve the benefits of a debt instrument, such as tax relief on interest payments. Issuers can defer coupon payments much the same as companies can defer dividend payments if they need to. They have very long or perpetual maturities, making them much like equity instruments. They have call options but no put options. Call options are attractive for issuers, because they can retire or replace the instrument if they can achieve bet
Augusto Urmeneta, a director in Merrill Lynch's capital markets group, explains why the hottest new innovation on Wall Street – hybrid securities – could become more relevant for Latin America.