Hybrid Financing can be defined as a combined face of equity and debt. This means that the characteristics of both equity and bond can be found in Hybrid Financing.There are several forms of Hybrid Financing like preference capital, convertible debentures, warrants, innovative hybrids and so on.
Purpose of Hybrid Financing:
The concept of Hybrid Financing has been developed to enjoy the positive factors of both the equities and debt instruments. The residual claim is related to the equities. If someone is holding shares of a particular company then it is obvious that the person would enjoy some special rights regarding the cash flow and the assets. At the same time, the shareholder of the company is also entitled to play an important role while making business decisions.
Debt instruments are totally different from equities. These instruments are used by the major companies to arrange a kind of loan for the development of the company. The debt instruments do not provide the right to take part in the management of the particular company. But at the same time, the debt instruments confirm a permanent claim on the assets of the company.
Now these two are totally different and the purpose of Hybrid Financing is to combine the qualities of both these investment instruments and to develop something better for the investors.
Types of Hybrid Financing
This capital is always preferred at the time of distribution of the dividends. Again, preference capital is paid first when the company is winding up its activities. The equity capital always comes next.
Warrant is a kind of hybrid financing and it is very close to security options. Any person who is holding a warrant is guaranteed to be provided with specific number underlying instruments and the prices for that instruments are fixed previously. This means that if the value of the particular instrument is going up the investor can make good amount of profit and if the market is not favorable, the warrant-holder is not bound to use the warrant. Like securities market, here also both the call and put warrants are available.
Convertible debentures are those that can be transformed into the shares of the same company. These debentures are also known as convertible bonds. The ratio of conversion from bond to share is fixed by the company and the bonds are ususally converted to common stocks.