Competing debt-equity classification regimes: Do firms care more about accounting
standards or rating agencies?
Martin Bierey*, Maximilian Muhn** and Martin Schmidt***
* ESCP Europe, Heubnerweg 8–10, D-14059 Berlin, Germany
E-Mail:
[email protected] (corresponding author)
** Humboldt-Universität zu Berlin, Dorotheenstraße 1, D-10099 Berlin, Germany
E-Mail:
[email protected]
*** ESCP Europe, Heubnerweg 8–10, D-14059 Berlin, Germany
E-Mail:
[email protected]
Acknowledgements:
We acknowledge helpful comments from Houdou Basse Mama (Discussant), Ulf
Brüggemann, Lucie Courteau, Joachim Gassen and Per Olsson as well as from conference
participants at the Inaugural Hybrid Bond Conference 2016 in London and research seminar
participants at Tübingen University and Humboldt University Berlin. We also thank our
contacts at two banks for providing us with data on hybrid issuances in Europe as well as
several other contacts at banks, industry and audit companies for sharing their views on the
hybrid bond market.
Competing debt-equity classification regimes: Do firms care more about accounting
standards or rating agencies?
This version: June 2016
Abstract
Our study examines firms’ motivation to issue hybrid securities and whether firms care more
about their classification under accounting standards or their treatment by rating agencies.
We focus on hybrid bonds, which became the most relevant hybrid security for European
non-financial firms. Depending on the chosen structure, hybrid bonds will (i) decrease GAAP
leverage or/and (ii) support firm’s credit rating. Our findings document that firms issue
hybrid bonds in quarters when their incentive to manage credit ratings increases. Conversely,
changes in GAAP leverage ratios do not seem to impact firm’s decision to issue a hybrid
bond. When comparing the types of hybrid bonds issued across rated and unrated firms, our
findings reveal that rated firms more often choose to issue hybrid bonds that are classified as
debt under accounting standards. These findings suggests that European rated firms care
more about the treatment of a hybrid security by rating agencies than about its classification
under accounting standards.
JEL Classification:
G24, M41, G32,
Keywords:
Hybrid
bonds,
debt-equity
classification, rating methodology
classification,
equity
content,
accounting
1
1.
Introduction
How to distinguish debt from equity is one of the most fundamental financial reporting
issues. Designing a classification regime with clear definitions for debt and equity is not only
complex, but the design of the regime directly affects a firm’s financing policy: Firms seem
to be more inclined to issue hybrid securities that are classified as equity and are willing to
incur substantial additional costs for the ability to classify a security as equity (or mezzanine)
instead of debt (e.g., Engel et al. 1999; Mills and Newberry 2005; Scott et al. 2011). After a
change in accounting standards that requires a particular hybrid security to be reclassified to
debt, the issuance volume of this type of security declines dramatically (De Jong et al. 2011;
Levi and Segal 2015).
Compared to accounting standard-setters, major credit rating agencies (S&P,
Moody’s, Fitch) apply a fundamentally different debt-equity classification regime. Rating
agencies’ detailed set of principles is aimed at assessing the economic substance of a security
and these principles are regularly reassessed to take into account financing innovations and
new market developments. Given that most hybrid securities are associated with debt-like
and equity-like features rating agencies will often assign partial (e.g., 25%, 50% or 75%)
equity content to hybrid securities. The classification of a security under accounting standards
does not impact rating agencies’ assessment. Consequently, particular types of hybrid
securities will be classified as debt under accounting standards, but treated as (intermediate)
equity by rating agencies and vice versa.
Although prior studies consistently document real economic consequences of the
debt-equity classification under accounting standards, it has not been examined whether
rating agencies’ treatment of hybrid securities affects a firm’s financing policy. If this was the
case, then the important question would arise whether rated firms care more about the
classification of a hybrid security under accounting standards or its classification by rating
agencies.
In order to examine this research question, we focus on European non-financial firms
and their decision to issue a certain type of hybrid security, called hybrid bond (or “step-up
bond”). With an issuance volume of € 92.1 billion, hybrid bonds were the most relevant class
of hybrid securities issued by European firms between 2013 and 2015. Similar to
conventional bonds, interest payments on hybrid bonds are tax deductible in most European
jurisdictions. However, depending on their structure hybrid bonds are eligible for being
classified as equity under accounting standards (IFRS) and/or may be assigned 50% equity
2
content by rating agencies. In fact, this preferential equity treatment could be a firm’s main
motivation to issue a hybrid bond instead of issuing conventional debt.
From a theoretical perspective, the static-tradeoff theory (pecking order theory)
predicts that firms prefer to issue conventional debt instead of equity until their reach their
target leverage (debt capacity). If firms define target leverage (debt capacity) either in terms
of GAAP leverage or credit ratings, they will have an incentive to issue a hybrid bond once
they reach or are close to reaching target leverage (debt capacity). This is the case, because
the issuance of a hybrid bond decreases GAAP leverage and/or supports firm’s credit rating.
In this light, the question whether firms care more about the classification of a hybrid bond
under accounting standards or by rating agencies is intimately concerned with the question
whether firms define their target leverage (debt capacity) in terms of GAAP leverage or credit
ratings.
We employ two sets of tests to examine our research question and focus on 115
hybrid bonds issued by 74 European firms between 2005 and 2016. First, we analyze the
timing of firms’ decisions to issue a hybrid bond and whether the issuance is triggered by a
deterioration of firms’ GAAP leverage ratios (e.g., equity ratio, interest coverage) or a
negative development in firms’ credit rating. We analyze whether a firm issues a hybrid bond
in the respective quarter and control for firm-fixed and quarter-fixed effects to identify the
firm-specific timing of the issuance. Our findings document that firms have a higher
probability of issuing a hybrid bond in the quarter after they are placed on negative rating
outlook or after their credit rating converges towards the investment grade/speculative grade
threshold. Crossing this threshold results in disproportionate changes in firm’s cost of debt
and, thus, provides firms with a strong incentive to manage their credit rating. Conversely,
our findings do not support that changes in GAAP leverage ratios affect firms’ decision to
issue a hybrid bond.
In our second set of tests we examine hybrid bond structures across rated and unrated
issuers. The main motivation for unrated firms to issue a hybrid bond instead of a
conventional bond is its equity classification under accounting standards, which improves
GAAP leverage ratios. However, once a credit rating is assigned to a firm, the credit rating
provides an alternative assessment of firm’s creditworthiness that investors and firms can
focus on instead of (or in addition to) GAAP leverage ratios. Thus, the availability of a credit
rating for a given firm could decrease the relevance of GAAP leverage ratios. Against this
backdrop, we hypothesize that rated firms place less emphasis on the hybrid bond
classification under accounting standards. In line with this argument, we find that, compared
3
to unrated firms, rated firms have a higher probability of issuing hybrid bonds that are
classified as debt under accounting standards.
Our findings illustrate that European rated firms primarily care about the treatment of
hybrid securities by rating agencies and issue hybrid securities when incentives to manage
their credit rating are high. Incentives to manage GAAP leverage seem to be of secondary
importance for rated firms’ decision to issue a hybrid security. These findings provide an
important contribution to the literature by illustrating the relative importance of rating
agencies’ debt-equity classification regime compared to the classification regime under
accounting standards. Our study has implications for accounting-standard setters, regulators
and researchers which have not yet scrutinized the impact of rating agencies’ treatment of
hybrid securities on firms’ financing policy. Against the backdrop of our findings, researchers
and regulators have to critically evaluate the potential consequences of rating agencies being
able to (i) impact the issuance volume of a hybrid security by classifying it as (intermediate)
equity and (ii) generating fees from rating this hybrid security.
2.
Structure and Terms of Hybrid Bonds
Hybrid bonds are a distinct class of hybrid securities, which are characterized by blending
features of both, debt and equity. In terms of their issuance volume between 2013 and 2015,
hybrid bonds (€ 92.1 bn) were the most relevant class of hybrid securities among European
non-financial firms, followed by convertible bonds (€ 57.3 bn) and preferred stock (€ 12.5
bn).1 A reason for the popularity of hybrid bonds is that particular hybrid bonds structures are
classified (i) as debt by most European tax authorities, so that interest payments are taxdeductible, (ii) as equity under accounting standards and (iii) as intermediate (i.e., 50%)
equity by credit rating agencies. In fact, hybrid bonds combine a debt-like cash flow pattern
(i.e., redemption of the principal amount, coupon payments) with an equity classification
under accounting standards and by rating agencies.
Hybrid bonds have the following characteristics: First, compared to senior bonds,
hybrid bonds are subordinated and will have lower recovery rates in the case the firm
defaults. Second, the instruments will have a very long maturity (sample median: 60 years) or
even an infinite maturity (“perpetual hybrid bond”). Third, hybrid bonds have determined
interest rates and interest payment dates, but interest payments can be deferred at the
discretion of the issuer. Taking only into account these three equity-like features, a hybrid
1
Issuance amounts were retrieved from Capital IQ (Item “Net proceeds” for equity offerings and item
“offering amount” for the issuance of remaining instruments). During the same period the aggregate amount
of senior bonds issued equaled € 1,662 bn, while equity issuances amounted to € 206 bn.
4
bond would resemble equity and preferred stocks more closely than conventional debt within
the debt-equity continuum.
However, there is a fourth feature, which increases the probability that the cash flow
pattern of the hybrid bond will resemble the cash flows related to a conventional bond. The
terms of the hybrid bond will stipulate one or more interest reset dates at which the payable
interest rate will substantially increase (the margin by which the interest rate increases is
called “step-up”). At the interest reset date(s), the issuer has the option to call (i.e., to redeem)
the hybrid bond, before the higher interest rate would become effective. In fact, step-ups are
designed to provide the issuer with a strong economic incentive to redeem the hybrid bond at
the interest reset date and thus before its stated maturity.2 If the issuer deferred any interest
payments, they will accrue cumulatively and would need to be paid the latest at the date when
the hybrid bond is redeemed.3
Interest expenses related to hybrid bonds will be tax-deductible in most European
jurisdictions (Morgan Stanley 2014; Danske Bank 2015; Financial Times 2015). Thus, the
main advantage in comparison to conventional bonds is the (50%) equity treatment of hybrid
bonds by rating agencies and/or the equity classification under accounting standards (IFRS).
The preferential equity treatment is a consequence of the issuers’ legal options to (i) defer
interest payments and to (ii) refrain from redeeming the bond at the interest reset date(s)
which increases the maturity of the hybrid bond and could theoretically lead to the issuer not
redeeming the bond at all. Investors will require compensation for these two risks and,
consequently, hybrid bonds will be priced at a premium over conventional bonds for a given
firm. This hybrid bond premium will inter alia be a function of the probability with which the
issuer will (i) defer any interest payments and (ii) refrains from redeeming the bond at the
interest reset date. In this light, higher interest rate step-ups which become effective early
within the lifetime of the hybrid bond will decrease the issuers’ economic incentive to
exercise these two legal options and ultimately decrease the hybrid bond premium.
Accounting standards and rating agencies stipulate different requirements for hybrid
bonds to be classified as equity (50% equity). In order to be classified as equity IAS 32
requires that the issuer of the financial instrument has no contractual obligation to deliver
financial assets (e.g., cash). Otherwise the instrument will be classified as debt (IAS 32.17).
2
3
Referred to as “economic compulsion” in the accounting literature to distinguish this type of bond from
financial liabilities that embody obligations.
Furthermore, virtually all hybrid bonds contracts include a clause according to which the issuer is not
allowed to pay a dividend to common stockholders, until all outstanding hybrid bond interest payments have
been made.
5
Therefore, hybrid bonds will be classified as equity under IFRS if interests can be deferred at
the option of the issuer and if the bond has no finite maturity (“perpetual hybrid bond”). In
contrast, all hybrid bonds with a finite maturity will be classified as debt under IFRS.
Figure 1 shows an exemplary structure of a hybrid bond, which would be classified as
100% equity under IFRS, given that the bond does not embody legal obligations, neither in
terms of settlement (no finite maturity) nor ongoing interest payments (Hybrid bond 1).
However, from an economic perspective, the issuer would be expected to redeem the bond
after five years: During the first five years the interest rate equals the reference rate (e.g.,
EURIBOR) plus a firm-specific spread, which reflects the default risk of the issuer and the
expected recovery rate. However, after five years an additional margin (i.e., step-up) of 250
basis points would be added to the initial spread. Under ordinary circumstances, the issuer
has a strong incentive to redeem the hybrid bond after these five years before the step-up
becomes effective. In fact, as long as the issuer’s default risk and refinancing conditions do
not deteriorate dramatically within the five years after the bond was issued, the hybrid bond
can be replaced by a similar instrument with a lower interest rate (compared to the interest
rate payable after the step-up becomes effective).
[INSERT FIGURE 1 ABOUT HERE]
Compared to the debt-equity classification regimes under accounting standards, credit
rating agencies apply a fundamentally different methodology when assigning the degree of
equity content to a hybrid security. During the first half of 2013, concurrently with a strong
increase in the issuance volume of hybrid bonds, S&P and Moody’s updated their criteria for
assigning equity content to hybrid bonds and provided more transparency regarding the
necessary criteria that hybrid bonds have to fulfill in order to be assigned with 50% equity
content (Moody's 2013; S&P 2013).
Hybrid bonds are classified as 50% equity (and 50% debt) by S&P, Moody’s and
Fitch if the structure of the hybrid bond meets particular criteria defined by the respective
rating agency – otherwise the hybrid bond will be assigned 0% equity content (i.e., 100%
debt).4 The criteria for assessing the equity content of hybrid bonds are broadly similar across
S&P, Moody’s and Fitch, which enables firms to issue hybrid securities that are classified as
50% equity by all of the three rating agencies. While only perpetual hybrid bonds are
classified as equity under IFRS, rating agencies do not focus on the contractual maturity of
4
Since 2013, Moody’s will assign 50% equity content only to hybrid bonds that were issued by companies
with an investment grade (issuer) rating (i.e. minimum rating of Baa). Hybrid bonds issued by companies
with a poorer issuer credit rating will be classified as 100% debt.
6
the hybrid bond, but determine and take into account the expected maturity. Compared to
Moody’s and Fitch, S&P generally applies the strictest criteria in terms of assessing the
expected maturity of the hybrid bond. Thus, most issuers focus on S&P’s criteria when
structuring hybrid bonds, which is reflected by the fact that S&P is the rating agency most
often cited in issuers’ hybrid bond contracts (Morgan Stanley 2014).
S&P defines the expected maturity date of a hybrid bond as the date on which the
cumulative step-up reaches at least 100 basis points. The hybrid bond will only be classified
as 50% equity as long as its expected maturity exceeds 20 years and will be classified as 0%
equity/100% debt thereafter (S&P 2008). Regarding the structures of hybrid bonds 2 and 3
(Figure 1), S&P would determine the expected maturity to be 25 years as the cumulative
step-up reaches 100 basis points at this time. Consequently, both hybrid bonds would be
treated as 50% equity by S&P over a period of five years (Moody’s and Fitch would assign
50% equity content even after this period). While rating agencies would not treat hybrid
bonds 2 and 3 differently, the former (latter) would be classified as 100% debt (equity) under
IFRS as it is, from a legal point of view, associated with a finite (infinite) maturity.
When issuing a hybrid bond (instead of a conventional bond) the issuer’s main
advantage is the increase in the firms’ reported creditworthiness, either because of the
decrease in GAAP leverage ratios or the supportive effect of the hybrid bond on the issuer’s
credit rating. Depending on whether firms care more about GAAP leverage ratios or their
credit rating, they will structure their hybrid bonds differently. In fact, a large number of
firms choose hybrid bond structures that match either the requirements of (i) rating agencies
or (ii) accounting standards for (partial) equity treatment. The reason is that each structure
comes with a tradeoff. In order to be classified as 50% equity by all three rating agencies, a
significant step-up (100 bps) may become effective only 20 years after the hybrid bond was
issued. This increases the expected maturity of the bond and investors will require a higher
hybrid premium (compared to a hybrid bond with a significant step-up that becomes effective
early within the lifetime of the bond).
If firms additionally want the hybrid bond to be classified as 100% equity under IFRS,
the bond must formally have an infinite maturity. However, perpetual hybrid bonds are priced
at a premium (compared to hybrid bonds with a finite maturity) for two reasons: First, the
investment guidelines of particular groups of investors do exclude perpetual bonds from the
scope of eligible investments (this is the case for a subset of insurance companies and
pension funds). Second, some investors will require a premium for holding a bond that could
theoretically never be redeemed by the issuers. In fact, our pricing analysis indicates that
7
firms pay a premium for issuing a perpetual hybrid bonds (see section 5.3). Another
disadvantage of issuing a perpetual hybrid bond is that it would not be eligible for hedge
accounting under IAS 39, because a hybrid bond classified as equity cannot be designated as
the hedged item. If the issuer chooses to hedge the interest rate risk or currency risk
associated with the hybrid bond, but these hedges do not qualify for hedge accounting, then
the hedging instrument will likely cause an accounting mismatch given that the hedging
instrument is measured at fair value through profit and loss while the hybrid bond is not. In
contrast, a hybrid bond with a finite maturity would be classified as debt, and allow the issuer
to apply hedge accounting, resulting in reduced earnings volatility.
Against this backdrop, we can exploit the variation in hybrid bond structures across
issuers in order to infer whether firms issued a hybrid bond in order to manage their GAAP
leverage ratios (e.g., equity ratio) or their credit rating by issuing a hybrid bond.
3.
Prior Literature and Hypotheses Development
Prior studies consistently document that the accounting classification of hybrid securities is a
major determinant of firm’s willingness to issue the respective security and that firms incur
substantial costs for the ability to classify a hybrid security as equity and not as debt. These
studies illustrate that the design of the debt-equity classification regime under accounting
standards has real economic consequences by impacting a firm’s financing policy.
Engel et al. (1999) focus on a sample of US firms that replace conventional debt by
trust preferred stock (TPS). While the interest payments on both types of securities are
tax-deductible, TPS was classified in a mezzanine section between debt and equity under
US-GAAP during the period of investigation. Engel et al. (1999) document that in order to
replace conventional debt with a comparable security that is not classified as debt (TPS),
firms are willing to incur additional costs that range from 4.14% to 28.86% of the issuance
volume. Scott et al. (2011) focus on Canadian firms issuing convertible bonds. A number of
the analyzed convertible bonds provide the issuer with the option to make interest and
principal payments with common shares instead of cash (“payment-in-kind”-feature) and a
large portion of these convertible bonds are classified as equity. The findings of Scott et al.
(2011) illustrate that firms with a high debt ratio and relatively large issuance volumes used
this payment-in-kind feature; apparently, in an effort to minimize reported leverage. Levi and
Segal (2015) show that firms with similar fundamentals, a high (industry-adjusted) debt ratio
and low interest coverage, had a higher propensity to issue mandatorily redeemable preferred
8
shares, during the time when they could be classified in the mezzanine section under US
GAAP.5
The fact that the debt-equity classification regime under accounting standards impacts
firms’ financing policy is further corroborated by studies focusing on changes in accounting
standards that effect the classification of hybrid securities. When a change in accounting
standards requires a particular type of security to be reclassified from the equity or mezzanine
section to debt, the majority of affected firms either redeem or restructure the hybrid security
to avoid an increase in reported leverage (De Jong et al. 2006; Levi and Segal 2015). In
addition, Levi and Segal (2015) show that the issuance volume of mandatorily redeemable
preferred shares significantly decreased after SFAS 150 required these securities to be
classified as debt.
There is only one study that is somewhat related to the question whether credit rating
agencies’ treatment of a hybrid security is a significant determinant of firm’s decision to issue
this security. Mills and Newberry (2005) focus on the difference between a firm’s (i) interest
expenses as reported in its tax returns and (ii) interest expenses as reported under its financial
statements. This difference is used as a proxy for the firm’s level of off-balance sheet debt
and hybrid securities (i.e., a higher level of off-balance sheet debt and hybrid securities leads
to relatively higher interest expenses in tax returns). Mills and Newberry (2005) document
that the extent to which firms use off-balance sheet debt and hybrid securities is positively
associated with firms’ industry-adjusted leverage and negatively associated with firms’ S&P
credit rating. It seems plausible that firms use these off-balance sheet instruments and hybrid
securities in order to manage (i.e., decrease) their reported GAAP leverage, given that these
instruments are not classified as debt in the firm’s financial statements. However, rating
agencies (S&P) apply a fundamentally different debt-equity classification regime. Particular
types of off-balance sheet debt which were not treated as debt under accounting standards,
and which drive the book-tax differences analyzed in Mills and Newberry (2005), are
classified as debt by rating agencies. For instance, one of the main drivers of the analyzed
book-tax differences are unconsolidated special-purpose-entities (SPEs), that were mainly
5
Besides a firm’s incentive to manage reported leverage, Marquardt and Wiedman (2005) provide evidence
that earnings management incentives play a role when structuring hybrid securities. They focus on firms’
decision to issue contingent convertible bonds, which are usually excluded when calculating diluted earnings
per share (EPS). Their findings indicate that firms have a higher propensity to issue contingent convertible
bonds when issuing conventional convertible bonds with the same nominal amount would have a
considerable adverse effect on diluted EPS and would negatively impact management’s EPS based
compensation. After a change in accounting standards, which would lead to contingent convertible bonds
adversely affecting diluted EPS, the respective firms either restructure or redeem these securities (Marquardt
and Wiedman 2007).
9
used for securitization transactions. During the sample period, the debt related to
unconsolidated SPEs did not increase GAAP leverage, but was incorporated in S&P’s
calculation of debt ratios if the firm retained any risks related to the assets that were
transferred to the SPE (S&P 2001). Thus, the analyzed book-tax differences capture
particular forms of off-balance sheet debt and hybrid securities that could be used to manage
GAAP leverage, but which were classified as debt by rating agencies and could not be used
to manage credit ratings.
Ultimately, after reviewing prior literature, it remains unclear whether rating
agencies’ debt-equity classification regime influences a firm’s decision to issue hybrid
securities. If this is the case, then the question arises whether firms care more about the
classification of a hybrid security by rating agencies or about its classification under
accounting standards. Put differently, do firms care more about the debt-equity classification
regime under accounting standards or about the equity content assigned by rating agencies
when they issue hybrid securities?
Two corporate finance theories are relevant in this respect. The pecking-order-theory
predicts that, due to information asymmetries, firms prefer internal financing over debt over
equity (Myers 1984; Myers and Majluf 1984). This theory implies that firms issue debt
(instead of equity) unless the firm reaches its debt capacity which means “unless the firm has
issued so much debt already that it would face substantial additional costs in issuing more”
(Myers 1984). The second theory, called static-tradeoff theory, predicts that firms prefer to
issue debt over equity until the firm-specific target leverage is reached (Bradley et al. 1984).
After reaching this target leverage, value maximizing firms’ refrain from issuing debt, given
that the bankruptcy costs associated with any additional debt issuance would exceed the
benefits of tax-deductible interest expenses.
In our setting, both theories would lead to similar predictions: If firms are close to
reaching their debt capacity (target leverage), they have an incentive to issue debt-like
securities, which would not lead to the firm exceeding its debt capacity (target leverage).
Thus, firms have an incentive to issue hybrid bonds if their debt capacity (target leverage) is
assessed either in terms of GAAP leverage or credit ratings. Given that the hybrid bond is
treated as equity (or 50% equity by rating agencies), it could even provide the firm with
additional headroom before reaching debt capacity (target leverage).
From a theoretical perspective, the opportunity to issue a debt-like security without
reaching these thresholds seems to be an important incentive for firms issuing a hybrid bond.
10
In this regard, the question of whether firms care more about the debt-equity classification
regime under accounting standards or by rating agencies is closely linked to the question
whether firms determine their debt capacity (target leverage) in terms of GAAP leverage
ratios or credit ratings. Rational firms will focus more on GAAP leverage or credit ratings
when assessing debt capacity (target leverage) depending on whether GAAP leverage or
credit ratings will have a stronger impact on the firm’s cost of capital (which, in turn, depends
on the firm-specific composition of investors and whether they focus more on credit ratings
or GAAP leverage).
In the first step, we will analyze the timing of a firm’s decision to issue a hybrid bond
and whether it is triggered by changes in GAAP leverage or credit ratings.
It is conceivable that firms define their debt capacity (target leverage) in terms of a
maximum (target) GAAP leverage ratio and that firms aim to avoid considerable deviations
from this threshold. Indeed, Graham and Harvey (2001) find that 81% of their surveyed firms
have either a specific target leverage or a target leverage range. To assess their debt capacity
(target leverage), firms could focus on one or multiple GAAP leverage thresholds such as
equity ratio, interest coverage or similar ratios. If firms define their debt capacity (target
leverage) in terms of GAAP leverage ratio(s) and issue a hybrid bond to avoid exceeding the
respective GAAP leverage ratio(s), we should observe that hybrid bonds are issued after an
increase in GAAP leverage ratios. Issuing a hybrid bond would allow the firm to avoid
exceeding this maximum (target) GAAP leverage ratio or to return to it.
H1a: The issuance of a hybrid bond will be triggered by a deterioration in GAAP leverage
ratios.
On the other hand, firms could define their debt capacity (target leverage) in terms of
minimum (target) credit ratings. Kisgen (2009) shows that subsequently to a rating
downgrade firms are more likely to reduce leverage by issuing less debt. This result holds
after controlling for target leverage behavior, which indicates that firms aim at returning to
their minimum (target) credit rating after rating downgrades. If firms define their debt
capacity (target leverage) in terms of minimum (target) credit ratings, then we should observe
that hybrid bonds are issued after a negative development in the firm’s credit rating. Such a
negative development in the firm’s credit rating could be indicated by a rating downgrade or
the firm’s rating being placed on Negative Watchlist or Negative Outlook.
11
H1b: The issuance of a hybrid bond will be triggered by a negative credit rating
development.
In a second step, we will analyze the variation in hybrid bond structures and whether unrated
firms choose structures that significantly differ from the structures chosen by rated firms.
Firms without a credit rating can define their debt capacity (target leverage) only in terms of
GAAP leverage ratios, which increases the importance of the debt-equity classification
regime under accounting standards. Thus, unrated firms will only have an incentive to issue
hybrid bonds that are classified as equity under IFRS (i.e., perpetual hybrid bonds).
In contrast, the relevance of GAAP leverage ratios might decrease once a firm obtains
a credit rating. This is the case, because credit ratings provide an alternative assessment of
firm’s creditworthiness that investors and firms can focus on instead of (or in addition to)
GAAP leverage ratios. If some of the rated firms place more weight on the credit rating than
on GAAP leverage ratios, they will mainly care about the hybrid bond being classified as
50% equity by rating agencies. Only in a second step, these firms might care about the
classification of the bond under accounting standards.
However, structuring the bond as equity under IFRS comes at the following costs:
Only perpetual hybrid bonds are classified as equity under IFRS – however, issuing a
perpetual hybrid bond (instead of a bond with a finite maturity) will be associated with a
higher hybrid bond premium (see section 5.3). In addition, a perpetual hybrid bond would
prohibit the firm from applying hedge accounting, which increases the volatility of their
earnings in the case the firm hedges the associated interest rate or currency risk.
Consequently, rated firms for which the costs of (i) a higher hybrid bond premium and (ii) the
inability to apply hedge accounting outweigh the benefits of the equity classification under
accounting standards would issue hybrid bonds with a finite maturity (these bonds are
classified as debt under accounting standards, but assigned 50% equity content by rating
agencies).
H2: Compared to unrated firms, rated firms will have a higher probability of issuing a hybrid
bond that is classified as debt under accounting standards
12
4.
Research Design
4.1.
Model & Variables
To test our hypotheses, we rely on a European panel data set with firm-quarters as the unit of
observation. For the first two hypotheses (H1a and H1b), we use the following model (1):6
𝐻𝑦𝑏𝑟𝑖𝑑𝐼𝑠𝑠𝑢𝑒𝑑𝑖,𝑡
= 𝛼𝑖 + 𝛽𝑡 + 𝛾𝑅𝑎𝑡𝑖𝑛𝑔𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒𝑠𝑖,𝑡−1
+ 𝛿𝐺𝐴𝐴𝑃𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒𝑠𝑖,𝑡−1 + 𝜃𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡−1 + 𝜀𝑖,𝑡
(
(1)
The dependent variable HybridIssued is a dummy variable that is coded as ‘1’ if firm i issues
a hybrid bond in quarter t and ‘0’ otherwise. Our analysis aims to capture if changes in the
credit rating or GAAP leverage prompted the firms to issue hybrid bonds. We use the
announcement date to determine the quarter of a hybrid bond issuance. The announcement
date is the earliest publicly available date that indicates a firm’s commitment to issue a hybrid
bond. However, it might take several months from the date when the firm initially decides to
issue a hybrid bond until the issuance decision will be announced (e.g., time for determining
the bond indentures, drafting the bond prospectus, etc.). For this reason, we lag all
independent variables by one quarter.7 Furthermore, the issuance of a hybrid bond is a
relatively rare event on the firm-quarter level and, hence, the dependent variable will take the
value of 0 for most observations.
To control for time trends and changes in the macroeconomic environment, we
include quarter-fixed effects (𝛽𝑡 ) in our main specifications. Furthermore, in almost all
specifications, we also add industry or firm-fixed effects (𝛼𝑖 ) to control for time-invariant
unobservables on the industry or firm level, respectively. Indeed, our most relevant analyses
are those that include fixed effects. These within-firm comparisons are less likely to suffer
from an omitted correlated variable bias and, in line with our hypotheses, allow us to analyze
the firm-specific timing of the hybrid bond issuance.
RatingIncentives comprise a set of variables that could explain the issuance of hybrid
bonds from a rating perspective. To proxy for these rating incentives, we use four different
variables. The first variable is the long-term issuer credit rating (MeanRat), which ranges
from -1 (best) to -23 (worst). Since H1b states that hybrid bond issuances are triggered by a
negative credit rating development, we would expect a negative relationship between
6
7
Variable definitions are included in the Appendix.
A one quarter lag might be too short for the time lag between the decision to issue a hybrid bond and the
official announcement date, which we use to determine the quarter of the hybrid issuance. Therefore, we also
lag our independent variables by two quarters and find very similar results.
13
MeanRat and HybridIssued. However, this negative relationship should only hold for
investment grade issuers. Speculative grade should have a lower probability of issuing hybrid
bonds for several reasons. For one, Moody’s does not assign any equity content to hybrid
bonds of speculative grade issuers (Moody’s 2013), which decreases speculative grade
issuers’ ability to manage their credit rating by issuing a hybrid bond. In addition, due to their
higher probability of facing financial distress, speculative grade issuers have a higher
probability of deferring interest payments and to refrain from redeeming the bond at its
expected call date. This circumstance deters investors from buying hybrid bonds of
speculative grade issuers. Therefore, only an improvement of the credit rating should increase
the ability for speculative grade firms to issue a hybrid bond, in particular for those that are
close to the investment grade threshold. Taken together, we do not have a clear prediction for
MeanRat as it should be negatively (positively) associated with the decision to issue a hybrid
bond for investment grade (speculative grade) firms.
We also include a variable that exploits this discontinuity around the investment
grade/speculative grade cut-off. We expect that firms which are closer to this cut-off are more
likely to issue hybrid bonds, because crossing the investment grade/speculative grade
threshold will be associated with disproportionately high changes in the firm’s cost of debt
(e.g., Kisgen 2006; Kisgen 2009; Chernenko and Sunderam 2012). This prediction should be
valid for both investment and speculative grade firms. In fact, firms which have an
investment grade rating but are close to the speculative grade threshold should have a strong
incentive to avoid a downgrade – in contrast, speculative grade firms have a strong incentive
to manage their rating upwards if that allows them to obtain an investment grade rating. The
corresponding variable DistanceFromIG is calculated as the absolute distance of the average
issuer rating to the investment grade/speculative grade cut-off value (i.e., BBB- (S&P and
Fitch); Baa3 (Moody’s)). Hence, we expect a negative relationship between DistanceFromIG
and the dependent variable. Finally, we also include two other rating incentive variables that
indicate a high probability of being downgraded in the short term, NegWatchlist (within the
next three months), and in the medium-term, NegOutlook (within the next 6 to 24 months). In
both instances, firms should have a strong incentive to issue hybrid bonds to protect their
rating and, hence, we predict a positive coefficient for both variables. In order to code our
RatingIncentive variables, we focus on the long-term issuer ratings provided by S&P,
Moody’s and Fitch. If a firm is covered by more than one of these rating agencies, we use the
mean of these (two or three) ratings to calculate MeanRat and DistanceFromIG.
14
NegWatchlist and NegOutlook capture the number of rating agencies that list the firm under
Negative Watchlist or Negative Outlook in the respective quarter.
The next set of variables, GAAPIncentives, are included in the model to test whether
changes in GAAP leverage ratios trigger the issuance of hybrid bonds. We use the variables
EquityRatio (Equity/TotalAssets) and interest coverage (EBIT/Interest Expenses) as GAAP
ratios that proxy for firms’ creditworthiness. A deterioration of these ratios should trigger
hybrid bond issuances if firms define their target leverage in terms of GAAP ratios.
Following this line of argument, we predict negative coefficients for both variables. In
robustness tests, we replace the EquityRatio, which captures (1 minus) the proportion of
financial and non-financial liabilities to total assets, with DebtQuota, which captures the
proportion of financial liabilities to total assets. Thus, our selection of GAAPIncentives
(EquityRatio, DebtQuota, InterestCoverage) follows the variables used in the most closely
related studies (Mills and Newberry 2005; Scott et al. 2011; Levi and Segal 2015).
In essence, we evaluate the relevance of RatingIncentives and GAAPIncentives for the
decision to issue a hybrid bond. Under H1a (H1b), we would expect a significant relationship
between those GAAPIncentives (RatingIncentives) and the dependent variable. A finding that
only RatingIncentives are correlated with hybrid bond issuances, while GAAPIncentives are
not, would be consistent with the notion that only credit ratings matter for rated firms.
Finally, we include a set of control variables (Controls). We predict that firms with a
high tangibility (PPERatio) and firms that pay dividends (DivPayer) have better access to the
hybrid bond market given that the former are associated with higher collateral value and the
latter with a lower probability of deferring interest payments. Instead of issuing hybrid bonds,
firms could manage their rating and GAAP leverage ratios by issuing equity. We control for
the firm’s market-to-book ratio (MTB), which should be positively associated with firm’s
ability and incentive to access the equity market. To proxy for potential tax incentives of
issuing hybrid bonds as an alternative to equity, we include the firms effective tax rate
(EffTaxRate). Furthermore, we control for the firm’s size (Size) and profitability (ROA).
While we start our analyses with logit regressions, we rely on OLS regressions in our
more sophisticated specifications with firm-fixed effects. We make this model choice because
non-linear models that include a large number of fixed-effects dummies tend to suffer from
incidental parameter problems (e.g., Greene 2004). Furthermore, standard-errors are adjusted
for heteroscedasticity and clustered at the firm level in all regressions (Petersen 2009).
Our analyses are based on firm-quarters and aim to explore whether changes in firm
fundamentals impact firm’s decision to issue a hybrid bond. In order to avoid that our
15
(quarterly) GAAP variables simply capture purely seasonal or transitory changes rather than
more persistent changes in firm fundamentals we calculate our variables by using trailing 12
month values for all income statement items (we do not use trailing 12 month values for
balance sheet items, given that they are measured as at the end of the respective quarter and
thus are less biased by seasonal changes within the respective quarter).
For our second hypothesis, we limit our sample to firm-quarters during which hybrid
bonds are issued. Relying on this substantially smaller sample, we estimate the following
model (2):
𝐸𝑞𝑢𝑖𝑡𝑦𝐻𝑦𝑏𝑟𝑖𝑑𝐼𝑠𝑠𝑢𝑒𝑑𝑖,𝑡
= 𝛽𝑡 + 𝜗𝑅𝑎𝑡𝐶𝑜𝑣𝑖,𝑡−1 + 𝜑𝑃𝑢𝑏𝑙𝑖𝑐𝑖,𝑡−1
+ 𝛿𝐺𝐴𝐴𝑃𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒𝑠𝑖,𝑡−1 + 𝜃𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡−1 + 𝜀𝑖,𝑡
(
(2)
EquityHybridIssued is a dummy variable coded as ‘1’ if a firm i issues a perpetual hybrid
bond (100 % equity under IFRS) in quarter t and ‘0’ otherwise. Since the sample only
consists of firm-quarter observations with hybrid bond issuances, all observations with a
value of ‘0’ for EquityHybridIssued are quarters during which hybrid bonds with long-dated
maturities are issued (100 % debt under IFRS). Note that by limiting our sample to hybrid
bond issuance quarters only, we compare a relatively homogenous set of firms.
In this analysis, our main explanatory variable is RatCov. This variable measures the
number of major rating agencies (S&P, Moody’s or Fitch) covering a certain firm in quarter t
(i.e., RatCov is a discrete variable taking the value 0, 1, 2 or 3). Since we expect that firms
with a credit rating are less likely to structure their hybrids in a way to obtain equity
classification under IFRS, we predict a negative coefficient for RatCov. Furthermore, we also
include the dummy Public, which takes the value of ‘1’ if a firm has public equity
outstanding and ‘0’ otherwise. Compared to model (1), we do not include RatingIncentives
and MTB given that we aim to exploit the variation across rated/unrated and public/private
firms. The remaining variables are those that were used in model (1).
Similar to our first model, we use both logit and OLS regressions and also include
quarter and industry-fixed effects in some specifications. However, we cannot use firm
fixed-effects in this set of tests, because our main variables RatCov and Public are timeinvariant for almost all firms during our sample period.
4.2.
Sample
Our initial sample includes all active European firms with public equity and/or debt
outstanding as reported by S&P Capital IQ of 31 Dec 2015 (8,887 firms). Panel A of Table 1
16
displays the filters that we applied to obtain our final public firm sample. We restrict our
sample to firms located in countries where at least one hybrid bond was issued during our
sample period and to firms that are at least as large as the smallest hybrid bond issuer (€ 325
million as of December 2014). These filters aim to make our control firms more comparable
to hybrid issuers in terms of economics, institutions and regulatory environment. We include
firm-quarter observations between Q1 2005 until Q1 2016 – we do not include observations
before 2005, given that the hybrid bond issuance volume by European corporates was
negligible before this date. Our final public firm sample consists of 1,194 unique firms and
44,189 firm-year observations. Approximately 25 % (18 %) of these firms (firm-years) have
a credit rating assigned by at least one of the major rating agencies S&P, Moody's or Fitch.
[INSERT TABLE 1 ABOUT HERE]
Panel B reports the descriptive statistics for hybrid bond issuers for three different samples
that are used throughout the analyses. As a baseline, we restrict our sample to public firms in
our main analyses (model (1)). However, due to the smaller sample size associated with the
test underlying model (2), we retain the maximum number of hybrid issuers in these analyses
(i.e., we only drop firms for which we could not calculate the variables that are included in
the respective analysis).
We identified hybrid bond issuers and issuances using three different sources. First,
we identify hybrid bond issuances using S&P Capital IQ.8 Second, two large German banks
that advise companies in structuring hybrid bonds provided us with their database of hybrid
bonds issued by European corporations. By using these lists, we are able to add hybrid bonds
to our sample that were not identified by our S&P Capital IQ filter. Third, we add bonds that
were not identified by the aforementioned sources but reported by Morgan Stanley (2014).
Using these different sources, we are able to identify 115 hybrid bonds issued by 74 firms
during our sample period. Comparing the issuance volume of the identified hybrid bonds with
the numbers reported by S&P corroborates that our procedure yields a comprehensive list of
European hybrid bond issuances.9
8
9
Capital IQ does not provide a specific data item to identify “hybrid bonds”. Therefore, we used the
following filters to identify hybrid bonds issued by European corporations: (i) Bond type: “Corporate
Debenture” and (ii) Seniority Level: “Subordinate” and (iii) Maturity date after 2040 or “Perpetual” and (iv)
Form of Ownership: “Global Security” or “Book Entry” and (v) Security Features: “Callable” and/or
“Redeemable”. In a second step, we read the press release that the company announced after issuing the
respective bond in order to identify whether it constitutes a hybrid bond or not.
S&P (2015, p. 4) reports that European corporations issued hybrid bonds with an aggregate amount of
approximately € 125bn between 2005 and April 2015. The aggregate offering amount of our hybrid bond
sample amounts to € 108.1 billion within the same period.
17
In our public firm sample, 60 firms (i.e., 5 % of all firms) issued 96 hybrid bonds
during our observation period. Notably, 72 % of these hybrid issuers are rated firms, which
could either reflect (i) that rated firms have a better hybrid bond market access or (ii) that
hybrid bonds are primarily used to manage credit ratings. More than two thirds of all hybrid
bonds are perpetual and, hence, classified as 100 % equity under IFRS.
Table 1 Panel C provides a breakdown of hybrid issuers by country, industry and
credit rating for the full sample. Hybrid bonds were mostly issued by firms incorporated in
Germany or France (37%). Not surprisingly, mostly firms in capital-intensive industries,
including utilities and industrials, issue hybrid bonds. Focusing on the 80 hybrid bonds issued
by rated companies reveals that most hybrid bonds were issued by firms slightly above the
investment grade threshold (85 % of all hybrid bonds are issued by firms between the A- to
BBB- category). In fact, not a single firm with an average speculative grade rating (BB+ or
lower) issues hybrid bonds. This descriptive result corroborates our argument that speculative
grade firms are essentially shut out from the hybrid bond market and validates our reasoning
that the predicted sign for MeanRat is ambiguous. Interestingly, most hybrids are not issued
by firms that are exactly at the investment grade/speculative grade cut-off (BBB-), but by
issuers with a slightly better rating. This result is likely due to the notching difference
between the issuer rating and the hybrid bond (issue) rating. The hybrid bond rating is
typically two to three notches lower than the issuer rating (Morgan Stanley 2014).
Consequently, only firms with an issuer rating of at least BBB+ are able to issue hybrid
bonds that are assigned an investment grade rating.
Table 2 Panel A summarizes descriptive statistics for hybrid issuers compared to
non-hybrid issuers. All continuous variables are winsorized at the 1st and 99th percentile.
Hybrid issuers and non-hybrid issuers are fundamentally different from each other along most
dimensions. For example, hybrid issuers are on average larger, have a lower equity ratio and
a better credit rating. These stark differences highlight the necessity to control for unobserved
time-invariant differences between both groups using firm-fixed effects. In the same spirit, as
a robustness check, we also limit our sample to firms with debt market access or even to
hybrid issuers only. Panel B of Table 2 includes only hybrid issuers and reveals that in the
quarter before the issuance of a hybrid bond, firms are substantially more often placed on
Negative Outlook, are closer to the investment/speculative grade threshold, and have a higher
GAAP leverage. This indicates that firms have a higher likelihood of issuing a hybrid bond at
a time when their reported creditworthiness is lower.
[INSERT TABLE 2 ABOUT HERE]
18
5.
Findings
5.1.
Main results
Table 3 summarizes our baseline regressions. Column (1) estimates the probability of issuing
a hybrid bond and includes rating incentive variables only. All coefficients are statistically
significant: MeanRat has a positive coefficient, which indicates that firms with a higher credit
rating are more likely to issue hybrid bonds. As outlined in section 4, this positive coefficient
does not contradict our hypothesis H1b, but is due to the fact that investment grade firms have
a better access to the hybrid bond market. Indeed, DistanceFromIG is negatively correlated
with the dependent variable, which means that firms which are closer to the investment
grade/speculative grade threshold are more likely to issue hybrid bonds. Taken together, these
two coefficients indicate that firms just above (but not below) this threshold are most likely to
issue hybrid bonds.
[INSERT TABLE 3 ABOUT HERE]
NegOutlook and NegWatchlist have the predicted positive signs, which is consistent with H1b,
and shows that hybrid bonds are more often issued by firms for which the rating is placed on
Negative Outlook or Negative Watchlist. In column (2), we add GAAP incentives and control
variables to the regression. Except for NegWatchlist, all coefficients of the rating variables
remain statistically significant and relatively unchanged in terms of magnitude. These results
hold after including industry and quarter-fixed effects as reported in column (3).10
In the logit specifications, also GAAP incentives are associated with the probability of
hybrid issuances, which is consistent with GAAP leverage ratios being an important
determinant for this financing decision. Columns 2 and 3 indicate that firms with a higher
GAAP leverage (lower EquityRatio, lower InterestCoverage) have a higher likelihood of
issuing a hybrid bond. This result might indicate that firms issue hybrid bonds to manage
GAAP leverage and mirrors the findings of prior studies that were based on comparable
models, but which did not include firm-fixed effects and do not fully control for rating
incentives (e.g., Levi and Segal 2015; Mills and Newberry 2005; Scott et al. 2011).
If we add firm-fixed effects to the regressions (column 4 to 7), only rating incentives
remain statistically significant, while GAAP leverage ratios do not appear to trigger the
issuance of a hybrid bond. Overall, this finding does not provide support for H1a. The
significant results for GAAP leverage in the specifications without firm-fixed effects (column
10
We have fewer observations in the logit regression with industry and quarter-fixed effects since we drop all
observations in which the industry or quarter fixed-effect dummies perfectly predict the outcome (i.e. the
non-issuance).
19
2 and 3) could reflect differences across firms (e.g., better access to the hybrid bond market
of firms with a higher leverage) rather than firms’ incentive to manage GAAP leverage.
In contrast, the firm-fixed effects analyses provide strong support for H1b, as
DistanceFromIG and NegOutlook are both statistically significant in all specifications,
regardless of whether controls (column 6) or quarter-fixed effects (column 7) are added to the
regressions. The effects for the rating incentive variables are also economically large. For
example, in column 7, moving one notch closer to the investment grade/speculative grade cut
off (i.e., DistanceFromIG changes by -1) affects the hybrid issuance probability by
approximately 36 basis points in the subsequent period. Similarly, if one (additional) rating
agency places the firm’s credit rating on NegOutlook, this rating adjustment increases the
firm’s probability of issuing a hybrid bond by approximately 12 basis points. These effects
are economically large given that hybrid bonds are only issued in 0.79 % (= 69 / 8,694) of all
firm-quarters.
In sum, our main analyses provide consistent evidence that rating incentives are an
important determinant for a firm’s decision to issue hybrid bonds.11 Conversely, we do not
find a significant relationship between GAAP leverage ratios and the issuance of hybrid
bonds after controlling for time-invariant firm characteristics via firm-fixed effects. This
finding suggests that rated firms define their target leverage (debt capacity) in terms of credit
ratings rather than GAAP leverage ratios.
However, GAAP leverage ratios should be more relevant for non-rated firms.
Therefore, we expect that all of these firms issue hybrid bonds that are treated as 100 %
equity under IFRS (H2). We explore the determinants of a firm’s decision to choose perpetual
hybrid bonds (100 % equity under IFRS) or hybrid bonds with a finite maturity (100 % debt
under IFRS). If GAAP leverage ratios are more relevant for non-rated firms, we would expect
that rated firms are less likely to issue perpetual hybrid bonds.
[INSERT TABLE 4 ABOUT HERE]
Column (1) reports the results for the full sample. Firms that are rated have a
significantly lower probability of issuing a perpetual hybrid bond. This result holds after
adding control variables (column 2) as well as quarter and industry-fixed effects (column 3)
to the model. Also excluding private firms (column 4) from our analysis, does not
11
One could argue that HybridIssued is not the most suitable dependent variable for our analyses since not all
of the included hybrid bonds are classified as equity under IFRS. However, replicating the analyses of
Table 3 with HybridIssued replaced by EquityHybridIssued (i.e., those that are classified as equity under
IFRS), leaves our results qualitatively unchanged. In particular, while DistanceFromIG and NegOutAll
remain statically significant in all regressions, GAAPIncentives are still not associated with
EquityHybridIssued in the firm-fixed effects regressions.
20
significantly alter our conclusions. Public becomes statistically significant in our
specifications with firm-level controls and fixed-effects and suggests that public firms are
more likely to issue hybrid bonds that are treated as 100% equity under IFRS. 12 These
findings are in line with the notion that public and unrated firms have a higher incentive to
decrease GAAP leverage ratios when issuing hybrid bonds. In contrast, private and rated
firms have a higher likelihood of issuing hybrid bonds that are treated as debt under IFRS.
These firms are willing to bear the associated increase in GAAP leverage ratios and benefit
from the advantages of issuing a dated hybrid bond (e.g., lower interest rate spread compared
to perpetual hybrid bonds, eligibility for hedge accounting). This finding suggests that a
considerable number of rated firms’ care more about the leverage as calculated by rating
agencies compared to leverage as reported under GAAP.
5.2.
Robustness tests
Our main analyses provide consistent evidence in support of H1b (credit ratings trigger the
issuance of hybrid bonds) and H2 (rated firms are more likely to issue hybrid bonds classified
as debt). To assess the robustness of our results, we conduct a battery of additional tests to
mitigate concerns about alternative explanations.
As a first robustness check, we test whether our results are driven by (unobservable)
differences between hybrid bond issuers and our control firms. To alleviate some of these
concerns, we apply additional filters with the aim of obtaining a more comparable set of
control firms. First, we restrict our sample to firms that have access to the debt market. In
particular, we require that every firm in our sample issues at least one conventional bond
during our observation period. Second, we restrict our sample to firms that issue at least one
hybrid bond during our sample period. In the latter analysis, all observations come from
hybrid issuers themselves and, hence, we only exploit the different timing of the hybrid
issuance. Table 5 presents the results of both analyses. For brevity, we only report the
coefficients of our rating incentives and GAAP incentives variables.
[INSERT TABLE 5 ABOUT HERE]
Panel A reports the results for the sample restricted to firms with debt market access.
Comparing the results of this panel with the results of Table 3 reveals no significant
differences. While the rating incentives DistanceFromIG and NegOutlook remain statistically
12
The insignificant result for Public in column (1) is due to the change in sample composition. After removing
all firms with insufficient balance sheet data (i.e., replacing the “full sample” by the “public & private
sample”) in our first specification, Public becomes statistically significant also in this specification.
21
significant across all specification, GAAP incentives are not correlated with the issuance of
hybrid bonds except for EquityRatio in column (3).
The results shown in Panel B are also in line with H1b. For example, while the
unconditional probability of issuing hybrid bonds is 4.07 % in column (7), a 1-point increase
(decrease) in NegOutlook (DistanceFromIG) for a given firm increases the probability of a
hybrid bond issuance by 312 (170) basis points. Furthermore, this robustness test provides
some additional, albeit weak, support for H1a. While there was no significant relationship
between GAAP incentives and hybrid bond issuances in the main analyses with firm
fixed-effects, either IntCover or EquityRatio are negatively associated with the dependent
variable in two of the four firm-fixed effects analyses.
Furthermore, as outlined in section 5, only investment grade firms issue hybrid bonds.
Therefore, as a further robustness check, we limit our sample to investment grade firms only
by removing all firm-quarter observations that have an average lagged rating below BBB- /
Baa3 (i.e., MeanRat below -10). Another advantage of this analysis is that DistanceFromIG
and MeanRat are now perfectly correlated with each other and, hence, only one of the two
variables is required in our analyses. This adjustment allows for an unambiguous negative
prediction for MeanRat, even in the specifications without firm-fixed effects.
[INSERT TABLE 6 ABOUT HERE]
Table 6 reports the results of our regressions after excluding speculative grade firms.
The results strongly corroborate the findings of our main analyses. In the specifications
without firm-fixed effects, MeanRat is no longer positively correlated with the main
dependent variable. Thus, if the sample is restricted to firms with decent access to the hybrid
bond market (investment grade firms), cross-sectional rating differences across firms do not
seem to drive hybrid bond issuance decision. In contrast, by including firm-fixed effects, we
find that investment grade firms are more likely to issue hybrid bonds after their credit rating
deteriorated or after they are placed on Negative Outlook by at least one of the three rating
agencies.
To further bolster the credibility of our findings, we use alternative constructions of
our dependent and our main independent variables. To show the effect of these adjustments,
we replicate our main specification (column (7) of Table 3) with these alternative variables.
Column (1) of Table 7 reports again the results of this main specification. In column (2), we
replace the dummy variable HybridIssued by HybridQuota, which measures the amount of
hybrid bonds outstanding by the respective firm divided by its lagged total assets. Thus, in
the firm-fixed effects regression, the variable captures the relative magnitude of the
22
respective hybrid bond issuance in the given quarter. While NegOutlook is not significantly
correlated with HybridQuota, both DistanceFromIG and MeanRat are negatively correlated
with the new dependent variable. Hence, if the rating of an investment grade firm
deteriorates, the likelihood of issuing hybrid bonds increases in the subsequent quarter.
Interestingly, EquityRatio is positively associated with HybridQuota. This suggests that firms
tend to increase their HybridQuota after increases in the EquityRatio which is not in line with
firms issuing hybrid bonds to decrease GAAP leverage (H1a).
[INSERT TABLE 7 ABOUT HERE]
In columns (3) and column (4), we estimate our main model and include only either MeanRat
or DistanceFromIG, respectively. In addition, we remove DistanceFromIG and replace it by
a simple dummy variable IGSGDummy in column (5). This dummy variable takes the value
of 1 if the firm’s MeanRating is within the broad rating categories surrounding the
speculative grade / investment grade threshold (i.e., between BBB+ and BB-) and 0
otherwise.
The results of these three regressions corroborates the notion that moving closer to the
investment grade / speculative grade threshold rather than a deterioration of the credit rating
per se seems to trigger the decision to issue a hybrid bond. This finding is consistent with our
arguments in section 4 and our overall hypothesis H1b. In line with our predictions, the
IGSGDummy is positively correlated with the dependent variable. If a firm’s credit rating
moves into the bandwidth around the threshold, the probability of issuing a hybrid bond in
the next quarter increases by 71 basis points. Again, this is a sizeable effect given that the
unconditional probability of issuing hybrid bonds is only 0.79 % in a given firm-quarter.
In column (6), we recode our discrete variables NegOutlook and NegWatchlist as
dummy variables. As before, NegOutDummy remains negatively associated with hybrid bond
issuance. If a firm’s credit rating receives a negative outlook by at least one rating agency, the
probability of issuing a hybrid bond in the subsequent quarter increases by 88 basis points. In
addition, placing a firm’s credit rating on Negative Watchlist also increases the firm’s
probability to issue a hybrid bond. Finally, in column (8), we replace EquityRatio by the
alternative variable DebtQuota (these two variables differ in terms of the treatment of nonfinancial liabilities; while non-financial liabilities decrease the firm’s EquityRatio they do not
increase the firm’s DebtQuota, as DebtQuota only considers financial liabilities in relation to
total assets). We find that changes in the firm’s DebtQuota are not significantly associated
with the probability of issuing a hybrid bond.
23
5.3.
Pricing of hybrid bonds
As outlined in section 2, firms have to pay a premium for hybrid bonds, because investors
require compensation for the additional risks they bear compared to conventional bonds.
Additionally, we argue that perpetual hybrid bonds (100 % equity under IFRS) are associated
with higher interest rates compared to hybrid bonds with dated maturities. To validate these
conjectures, we estimate the premium that a given firm has to pay for issuing a hybrid bond
instead of a conventional bond.
For each hybrid bond we identify conventional bonds of comparable size that were
issued by the same firm. In the next step, we match each hybrid bond to the conventional
bond for which the offering date is closest to the announcement date of the hybrid bond.13
The spread between the hybrid and the conventional bond (in percentage points) is our
dependent variable CouponDiff. We also control for differences in maturity (MaturityDiff),
basis interest rate level (LIBORDiff) and issue size (SizeDiff) across both instruments.
However, since we effectively pre-match on the offering date and the relative size
differences, we do not necessarily expect that LIBORDiff or SizeDiff affect the spread
between both coupons.
Table 8 reports the results for the pricing regression. In column (1) we do not impose
any further restriction. In contrast, we require the closest conventional bond to be issued 360
days (180 days) before or after the hybrid bond offering date in order to be included in the
analysis underlying column (2) (column (3)).
[INSERT TABLE 8 ABOUT HERE]
Overall, all three regressions provide fairly consistent results. Of the control variables, only
the variable MaturityDiff is positively correlated with the coupon difference. This correlation
indicates that a relatively longer duration of a hybrid bond increases its interest rate premium.
More importantly, the constant in all regressions is roughly 1.5 to 1.6 and significantly
different from 0. Additionally, in two of the three specifications, the IFRSEquity dummy is
positively correlated with the coupon difference. Taken at face value, these results suggest
that firms have to pay an average premium of approximately 150 basis points for a long-dated
hybrid bond, which increases by another 80 basis points if the hybrid bond is structured as
100% equity under IFRS.
13
To make hybrid bonds and conventional bonds more comparable, we only consider sufficiently large bonds
(offering amount larger than 100mn) with a relative size difference between hybrid and conventional bonds
of less than 1 % of the firm’s total assets. We also focus only on rated firms since unrated firms only issue
hybrid bonds which are classified as 100 % equity under IFRS. If we include those unrated firms, our
IFRSEquity dummy would rather pick up differences in the pricing for rated and unrated firms than
differences between the equity and debt classification under IFRS.
24
However, the estimates of the magnitude of the premium have to be interpreted with
caution. These estimates are driven by a few number of firms with an underlying endogenous
decision making process. For example, all firms that issue hybrid bonds are investment grade
firms and the premiums would likely to be larger for speculative grade firms.
6.
Conclusion
Our study examines whether firms issue hybrid bonds in order to manage (i) GAAP leverage
ratios or (ii) credit ratings. Across different specifications, we find strong and robust evidence
that rating incentives drive the decision to issue a hybrid. In contrast, we find little evidence
that a deterioration of GAAP leverage ratios triggers the decision to issue hybrid bonds.
Taken together, these results suggest that rated firms rather define their target leverage in
terms of credit ratings instead of GAAP numbers.
For unrated firms, however, we find some evidence that GAAP leverage ratios are
important. Indeed, unrated firms have an approximately 40 % higher likelihood of structuring
their hybrid bonds as “perpetual”, which provides 100 % equity content under current
accounting standards. Consequently, these unrated firms seem to incur substantial additional
costs to receive this beneficial balance sheet treatment, while rated firms mainly seem to care
about the classification of a hybrid bond by rating agencies.
Our findings substantially enhance our understanding on firm’s incentives to issue
hybrid securities. While prior studies consistently document that the debt-equity classification
regime under accounting standards impacts firms’ financing policy, our findings indicate that
European firms care more about the classification of a hybrid security by rating agencies.
This finding has important implications for regulators and accounting standard setters
alike: Our findings imply that rating agencies have the ability to impact the popularity of a
hybrid security by assigning equity content to that instrument. In this light, regulators have to
ensure that rating agencies’ classification of a given hybrid security is not impacted by the
amount of fees that rating agencies generate by rating this security.
Furthermore, our findings could reflect that rating agencies’ debt-equity classification
regime is superior in capturing the economic substance of hybrid security (compared to the
debt-equity classification regime under accounting standards). In this case, investors would
place more weight on rating agencies’ debt-equity classification regime, which decreases the
relevance of GAAP leverage ratios and would explain why firms care more about rating
agencies’ treatment of a hybrid security. We leave it to future research to explore whether
rating agencies or accounting standards are superior in capturing the economic substance of
hybrid securities.
25
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27
Appendix
The following table provides a description of all variables and their sources.
Variable
Definition
Source
Dependent variables
HybridIssued
Indicator variable coded as ‘1’ if the firm issues a hybrid
bond in the respective quarter and ‘0’ otherwise.
EquityHybridIssued
Indicator variable coded as ‘1’ if the firm issues a perpetual
hybrid bond (classified as equity under IFRS) in the
respective quarter and ‘0’ otherwise.
Multiple sources
(see main text)
CapitalIQ
Rating incentives
Data on Credit rating, Outlook and Watchlist as assigned by S&P is based on S&P’s long term issuer rating and
collected from Capital IQ (IQ_SP_ISSUER_RATING). Data on Credit Ratings, Outlook and Watchlist as
assigned by Moody’s and Fitch is collected from Thomson Eikon and based on the Long-Term issuer rating
(MIS, FIS). If the Long-Term issuer rating is not available we use the senior unsecured rating (MSU, FSU).
MeanRat
Mean issuer credit rating of a firm as assigned by S&P
and/or Moody’s and/or Fitch. The variable ranges
from -1 (best) to -23 (worst).
CapitalIQ, Thomson
Eikon
DistanceFromIG
Absolute distance of the MeanRat to the investment
grade/speculative grade cut-off BBB- (-10). The variable
ranges from 0 (closest distance) to 13 (furthest distance).
CapitalIQ, Thomson
Eikon
NegOutlook
Takes the value ‘1’ (‘2’, ‘3’) if the issuer’s rating is on
Negative Outlook by 1 (2, 3) of the major rating agencies
S&P, Moody’s and Fitch as of the respective quarter.
Otherwise the variable is coded as ‘0’.
CapitalIQ, Thomson
Eikon
Takes the value ‘1’ (‘2’, ‘3’) if a firm is on Negative
Watchlist by 1 (2, 3) of the major rating agencies S&P,
Moody’s and Fitch as of the respective quarter. Otherwise
the variable is coded as ‘0’.
CapitalIQ, Thomson
Eikon
NegWatchlist
GAAP incentives
EquityRatio
Total equity (IQ_TOTAL_EQUITY) divided by total assets
(IQ_TOTAL_ASSETS).
Capital IQ
IntCover
Earnings before interest and taxes (IQ_EBIT) divided by
total interest expenses (IQ_INTEREST_EXP).
Capital IQ
Size
Log of firm’s total assets (IQ_TOTAL_ASSETS).
Capital IQ
MTB
Market value of equity (IQ_MARKETCAP) divided by the
book value of total equity (IQ_TOTAL_EQUITY).
Capital IQ
DivPayer
Time-variant dummy variable coded as 1 if the firm pays a
dividend (IQ_TOTAL_DIV_PAID_CF) in the respective
Capital IQ
Controls
28
year and 0 otherwise.
ROA
Earnings before interest and taxes (EBIT) divided by total
assets (IQ_TOTAL_ASSETS).
Capital IQ
PPERatio
Property, plant and equipment (PPE) divided by total assets
(IQ_TOTAL_ASSETS).
Capital IQ
EffTaxRate
Tax expenses (IQ_INC_TAX) divided by earnings before
taxes (IQ_EBT_EXCL).
Industry dummies
Industry dummies based on the ten Global Industry
Classification Standard (GICS) sectors
(IQ_PRIMARY_INDUSTRY).
Capital IQ
CapitalIQ
Other main independent variables
RatCov
Takes the value ‘1’ (‘2’, ‘3’) if the firm is assigned with an
issuer credit rating by 1 (2, 3) of the rating agencies S&P,
Moody’s and Fitch and ‘0’ otherwise.
CapitalIQ, Thomson
Eikon
Public
Indicator variable that is coded with ‘1’ if the firm’s equity
securities are publicly traded (IQ_COMPANY_TYPE) and
‘0’ otherwise.
CapitalIQ
Outstanding hybrid bonds (in terms of offering amount) as
of the respective quarter divided by lagged total assets
(IQ_TOTAL_ASSETS).
CapitalIQ
IGSGDummy
Indicator variable coded with ‘1’ if the MeanRat is between
BBB+ (-8) and BB- (-13) in the respective quarter and ‘0’
otherwise.
CapitalIQ, Thomson
Eikon
NegOutDummy
Indicator variable coded with ‘1’ if the firm’s issuer rating
is on Negative Outlook by at least one rating agency (S&P,
Moody’s or Fitch) as of the respective quarter and ‘0’
otherwise.
CapitalIQ, Thomson
Eikon
Indicator variable coded with ‘1’ if the firm’s issuer rating
is on Negative Watch List by at least one rating agency
(S&P, Moody’s or Fitch) as of the respective quarter and
‘0’ otherwise.
CapitalIQ, Thomson
Eikon
Robustness checks
HybridQuota
NegWatchDummy
DebtQuota
Total debt (IQ_TOTAL_DEBT) divided by total assets
(IQ_TOTAL_ASSETS).
CapitalIQ
Difference in the coupon of a hybrid bond and the matched
CapitalIQ
Additional analyses
CouponDiff
29
conventional bond in percentage points.
MaturityDiff
Difference (number of days) in the duration of a hybrid
bond and a matched conventional bond. The first call date
of the hybrid bond is used as the effective maturity date for
this instrument.
CapitalIQ
Difference in the offering amounts between the hybrid bond
and the matched conventional bond divided by total assets
(IQ_TOTAL_ASSETS).
CapitalIQ
LIBORDiff
Difference between the Libor rates (i) as of the hybrid bond
announcement date and (ii) as of the conventional bond
offering date. The 12-Month London Interbank Offered
Rate (LIBOR) is used to determine Libor rates.
Federal Reserve
Economic Data
(Federal Reserve
Bank of St. Louis)
IFRSEquity
Indicator variable that takes the value of ‘1’ if the hybrid
bond is perpetual and ‘0’ otherwise.
SizeDiff
CapitalIQ
30
Figures
Figure 1: Typical structures of hybrid bonds
Hybrid Structure 1: Example of a hybrid bond which would be classified as 100% equity under IFRS and treated as 0% equity by rating agencies.
Hybrid Structure 2: Example of a hybrid bond which would be classified as 0% equity under IFRS and treated as 50% equity by credit rating agencies
Hybrid Structure 3: Example of a hybrid bond which would be classified as 100% equity under IFRS and treated as 50% equity by credit rating agencies
31
Tables
Table 1: Sample selection
Panel A: Sample selection process (number of sample firms)
Active European public companies and active European private companies with public debt covered by Capital IQ
less firms classified as "Banks", "Insurance" or "Diversified Financial"
8,887
1,027
less firms with total assets below that smallest hybrid bond issuer (total assets as of 31 Dec 2014 below EUR 325 m)
5,632
less firms consolidated by a larger firm within the same group
265
less firms incorporated in countries where no hybrid bond was issued
514
Full sample
1,449
less firms without necessary data to compute independent variables
88
less private firms
157
less firms with only one observation during sample period (Singletons in firm-fixed effects regressions)
10
Public firm sample
1,194
Thereof: Firms with a credit rating by S&P, Moody's or Fitch during the sample period (Public Rated firm sample)
306
Thereof: Firms without a credit rating by S&P, Moody's or Fitch during the sample period
888
Panel B: Hybrid bonds issued
Rated & Unrated
Rated only
Bonds
Firms
Bonds
Firms
115
74
80
48
Thereof: Hybrid bonds that are treated as equity under IFRS (perpetual)
81
55
46
28
Thereof: Hybrid bonds that are treated as debt under IFRS (dated maturity)
34
23
34
23
./. less observations without balance sheet data
10
9
4
3
105
65
76
45
9
5
7
3
96
60
69
42
Full sample: Hybrid bonds issued during sample period
Public and private firm sample
./. less observations of private firms
Public firm sample
32
Table 1: Sample selection (continued)
Panel C: Countries, industries and rating for hybrid issuers
Country
Bonds
Firms
Austria
9
6
Belgium
4
2
Denmark
5
France
17
Industry
Bonds
Firms
Rating
Quarter Before Issuance
Remaining Quarters
Consumer Discretionary
9
7
AAA
0
0%
0
0%
Consumer Staples
9
6
AA+
1
1%
56
3%
2
Energy
10
6
AA
0
0%
48
3%
12
Healthcare
8
5
AA-
5
6%
71
4%
Finland
9
8
Industrials
12
10
A+
2
3%
135
7%
Germany
25
13
Information Technology
0
0
A
6
8%
205
11%
Italy
3
2
Materials
13
9
A-
24
30%
479
25%
Luxembourg
6
3
Real Estate
8
6
BBB+
17
21%
351
18%
Netherlands
7
6
Telecommunications
10
6
BBB
18
23%
292
15%
Portugal
1
1
Utilities
36
19
BBB-
7
9%
156
8%
Spain
8
4
BB+
0
0%
48
3%
Sweden
4
3
BB
0
0%
16
1%
Switzerland
8
5
BB-
0
0%
25
1%
United Kingdom
9
7
< BB-
0
0%
29
2%
Total
115
74
Total
115
74
Total
80
1,911
The descriptive statistics in this table (i.e., country, industry and rating) refer to the largest firm within the group that issued the hybrid bond (the actual firm with the group
that issued the hybrid bond could be a subsidiary that is incorporated in a different country).
33
Table 2: Descriptive statistics
Panel A: Hybrid Issuers vs. Non-Hybrid Issuers
Hybrid Issuer
N
Non Hybrid Issuer
Mean
Median
STD
N
Mean
Median
STD
DistanceIG/SG
1,697
2.65
2.50
1.88
6,997
2.45
2.00
1.83
Rating
1,697
-7.71
-7.67
2.31
6,997
-9.10
-9.00
2.92
NegOutlook
1,697
0.42
0.00
0.60
6,997
0.25
0.00
0.48
NegWatchlist
1,697
0.21
0.00
0.59
6,997
0.08
0.00
0.32
RatCov
2,674
1.24
1.00
1.07
41,515
0.24
0.00
0.59
EquityRatio
2,674
0.33
0.34
0.12
41,515
0.40
0.39
0.17
InterestCover
2,674
5.81
3.74
8.97
41,515
27.14
6.06
89.70
MTB
2,674
1.80
1.45
1.35
41,515
2.48
1.78
2.48
DivPayer
2,674
0.97
1.00
0.17
41,515
0.85
1.00
0.35
ROA
2,674
0.06
0.06
0.04
41,515
0.08
0.07
0.07
PPE_Ratio
2,674
0.36
0.33
0.20
41,515
0.27
0.22
0.23
EffTaxRate
2,674
0.25
0.24
0.21
41,515
0.26
0.25
0.23
TotalAssets
2,674
Variable definitions are provided in Appendix A.
41,306.7
18,985.9
57,923.0
41,515
6,019.6
1,385.7
17,176.6
34
Table 2: Descriptive statistics (continued)
Panel B: Hybrids Issuers only
Quarter before Hybrid Issuance
N
Mean
Remaining Quarters (only Hybrid Issuers )
Median
STD
N
Mean
Median
STD
DistanceIG/SG
69
2.34
2.33
1.59
1,628
2.67
2.50
1.89
Rating
69
-7.67
-7.67
1.61
1,628
-7.71
-7.67
2.34
NegOutlook
69
0.77
1.00
0.77
1,628
0.40
0.00
0.59
NegWatchlist
69
0.28
0.00
0.59
1,628
0.21
0.00
0.59
RatCov
96
1.40
2.00
1.05
2,578
1.24
1.00
1.07
EquityRatio
96
0.31
0.31
0.11
2,578
0.33
0.34
0.12
InterestCover
96
4.26
3.48
3.53
2,578
5.86
3.75
9.10
MTB
96
1.61
1.21
1.25
2,578
1.80
1.46
1.35
DivPayer
96
0.97
1.00
0.17
2,578
0.97
1.00
0.17
ROA
96
0.05
0.05
0.03
2,578
0.06
0.06
0.04
PPE_Ratio
96
0.33
0.33
0.18
2,578
0.36
0.33
0.20
EffTaxRate
96
0.26
0.22
0.27
2,578
0.25
0.24
0.21
TotalAssets
96
56,238.4
24,395.2
77,610.9
2,578
40,750.7
18,781.5
The descriptive statistics illustrated in this table are based on hybrid bond issuers within the public firm sample. Variable definitions are provided in Appendix A.
57,003.4
35
Table 3: Determinants of firm’s hybrid bond issuance decisions
VARIABLES
DistanceFromIG
MeanRat
NegOutlook
NegWatchlist
(1)
Logit
-1.387***
(0.511)
1.376***
(0.504)
1.162***
(0.212)
0.387**
(0.165)
EquityRatio
IntCover
MTB
DivPayer
ROA
PPERatio
EffTaxRate
Size
Constant
8.572*
(5.071)
(2)
Logit
-1.629**
(0.633)
1.593**
(0.633)
0.717***
(0.200)
0.149
(0.184)
-1.494
(0.986)
-0.061**
(0.027)
-0.170
(0.112)
-0.634
(0.848)
-2.262
(3.512)
1.165
(0.758)
-0.250
(0.636)
0.590***
(0.155)
6.769
(6.877)
Dependent Variable: HybridIssued
(3)
(4)
Logit
OLS
-1.742***
-0.004***
(0.508)
(0.001)
1.732***
-0.002*
(0.509)
(0.001)
0.622***
0.011***
(0.203)
(0.003)
0.364**
0.004
(0.175)
(0.004)
-4.024***
(1.148)
-0.043
(0.029)
-0.213**
(0.095)
-0.185
(0.817)
-2.343
(3.771)
-0.693
(0.938)
-1.079
(0.687)
0.479***
(0.143)
9.825*
(5.695)
(5)
OLS
-0.002
(0.002)
-0.000
(0.000)
(6)
OLS
-0.004***
(0.001)
-0.002
(0.001)
0.011***
(0.004)
0.004
(0.004)
0.014
(0.017)
0.000
(0.000)
-0.000
(0.000)
0.003
(0.003)
-0.018
(0.027)
0.007
(0.018)
-0.005
(0.005)
-0.004
(0.005)
(7)
OLS
-0.003***
(0.001)
-0.000
(0.001)
0.012***
(0.004)
0.005
(0.004)
0.005
(0.017)
-0.000
(0.000)
-0.001***
(0.000)
0.004
(0.003)
-0.014
(0.028)
0.010
(0.019)
-0.006
(0.005)
-0.013**
(0.006)
Firm FE
NO
NO
NO
YES
YES
YES
YES
Quarter FE
NO
NO
YES
NO
NO
NO
YES
Industry FE
NO
NO
YES
NO
NO
NO
NO
Sample
Public Rated
Public Rated
Public Rated
Public Rated
Public
Public Rated
Public Rated
Adj. R2
0.100
0.161
0.272
0.0322
0.0306
0.0316
0.0387
No. Firms
306
306
293
306
1194
306
306
No. Obs
8694
8694
4971
8694
44189
8694
8694
Robust standard errors clustered by firms in parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level.
36
Table 4: Determinants of choosing perpetual hybrid bonds structures
VARIABLES
RatCov
Public
(1)
Logit
-1.114***
(0.266)
1.126
(0.724)
EquityRatio
IntCover
ROA
PPERatio
EffTaxRate
DivPayer
Size
Constant
1.663**
(0.716)
Dependent Variable: EquityHybridIssued
(2)
Logit
-0.908**
(0.373)
2.746***
(0.943)
1.572
(2.450)
-0.030
(0.097)
-7.515
(12.721)
2.171
(2.093)
0.806
(1.046)
1.789*
(0.944)
-0.292
(0.273)
0.105
(2.854)
(3)
OLS
(4)
OLS
-0.174**
(0.067)
0.572***
(0.215)
-0.035
(0.647)
0.024
(0.019)
-3.645
(2.998)
0.352
(0.354)
0.173*
(0.102)
0.086
(0.174)
-0.004
(0.062)
-0.181**
(0.079)
-0.132
(0.770)
0.021
(0.018)
-3.500
(3.049)
0.212
(0.372)
0.180*
(0.104)
-0.026
(0.270)
0.006
(0.064)
Firm FE
NO
NO
NO
NO
Time FE
NO
NO
YES
YES
Industry FE
NO
NO
YES
YES
Sample
Full
Public & Private
Public & Private
Public
R2
0.195
0.232
0.344
0.261
No. Firms
74
65
59
54
No. Obs
115
105
95
86
This table presents the results of models estimating the determinants of the chosen hybrid bond structures. The dependent variable EquityHybridIssued is coded as ‘1’ if the
firm issues a perpetual hybrid bond (classified as equity under IFRS) – if the firms issues a dated hybrid bond (classified as debt) the dependent variable is coded as ‘0’.
Robust standard errors clustered by firms in parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level. Variable definitions
are provided in Appendix A.
37
Table 5a: Robustness Test (sample restricted to firms with access to public debt market)
VARIABLES
DistanceFromIG
MeanRat
NegOutlook
NegWatchlist
EquityRatio
IntCover
(1)
Logit
(2)
Logit
-1.303**
(0.524)
1.303**
(0.517)
1.056***
(0.213)
0.326*
(0.167)
-1.674**
(0.715)
1.651**
(0.715)
0.682***
(0.201)
0.132
(0.180)
-1.223
(0.987)
-0.047*
(0.028)
Dependent Variable: HybridIssued
(3)
(4)
Logit
OLS
-1.768***
(0.560)
1.782***
(0.563)
0.635***
(0.204)
0.379**
(0.177)
-4.058***
(1.217)
-0.036
(0.028)
(5)
OLS
(6)
OLS
(7)
OLS
-0.007
(0.009)
-0.000
(0.000)
-0.005***
(0.002)
-0.002
(0.002)
0.013***
(0.005)
0.005
(0.005)
0.019
(0.025)
-0.000
(0.000)
-0.004**
(0.002)
-0.000
(0.002)
0.014***
(0.005)
0.006
(0.005)
0.006
(0.026)
-0.000
(0.000)
-0.005***
(0.002)
-0.002
(0.001)
0.014***
(0.004)
0.005
(0.005)
Controls
NO
YES
YES
NO
NO
YES
YES
Firm FE
NO
NO
NO
YES
YES
YES
YES
Quarter FE
NO
NO
YES
NO
NO
NO
YES
Industry FE
NO
NO
YES
NO
NO
NO
NO
Sample
Public Rated
Public Rated
Public Rated
Public Rated
Public
Public Rated
Public Rated
Adj. R2
0.0813
0.133
0.244
0.0369
0.0277
0.0362
0.0454
No. Firms
175
175
168
172
302
172
172
No. Obs
6007
6007
3311
6004
12320
6004
6004
This robustness test replicates our main analyses (Table 3) while restricting the sample to firms that issued at least one conventional bond (“corporate debenture” under
Capital IQ) within our sample period (i.e., Q1 2005 until Q1 2016). Robust standard errors clustered by firms in parentheses; ***, ** and * indicate that the coefficients are
different from zero at the 1%, 5% or 10% level. Variable definitions are provided in Appendix A.
38
Table 5b: Robustness Test (sample restricted to hybrid bond issuers)
VARIABLES
DistanceFromIG
MeanRat
NegOutAll
NegWatchAll
EquityRatio
IntCover
(1)
Logit
(2)
Logit
(3)
Logit
(4)
OLS
-1.278***
(0.435)
1.199***
(0.431)
0.855***
(0.190)
0.121
(0.162)
-1.331***
(0.455)
1.318***
(0.454)
0.771***
(0.186)
0.123
(0.165)
-1.295
(1.210)
-0.001
(0.008)
-1.509***
(0.507)
1.653***
(0.503)
0.873***
(0.190)
0.460**
(0.194)
-4.580**
(1.959)
-0.041
(0.030)
-0.028***
(0.010)
0.001
(0.008)
0.036***
(0.011)
0.015*
(0.009)
(5)
OLS
(6)
OLS
(7)
OLS
-0.043
(0.064)
-0.001***
(0.000)
-0.026***
(0.009)
-0.000
(0.007)
0.035***
(0.012)
0.013
(0.008)
-0.077
(0.121)
-0.000
(0.000)
-0.017**
(0.008)
0.006
(0.008)
0.031**
(0.012)
0.015*
(0.008)
-0.242**
(0.107)
-0.000
(0.000)
Controls
NO
YES
YES
NO
NO
YES
YES
Firm FE
NO
NO
NO
YES
YES
YES
YES
Quarter FE
NO
NO
YES
NO
NO
NO
YES
Industry FE
NO
NO
YES
NO
NO
NO
NO
Sample
Public Rated
Public Rated
Public Rated
Public Rated
Public
Public Rated
Public Rated
Adj. R2
0.0557
0.0717
0.170
0.0265
0.000950
0.0269
0.0586
No. Firms
45
45
45
45
63
45
45
No. Obs
1697
1697
963
1697
2674
1697
1697
This robustness test replicates our main analyses (Table 3) while restricting the sample to firms that issued a hybrid bond within our sample period (i.e., Q1 2005 until Q1
2016). Robust standard errors clustered by firms in parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level. Variable
definitions are provided in Appendix A.
39
Table 6: Robustness Test (sample restricted to Investment Grade Firms)
VARIABLES
MeanRat
NegOutlook
NegWatchlist
(1)
Logit
-0.069
(0.087)
1.204***
(0.212)
0.385**
(0.167)
EquityRatio
IntCover
Constant
-5.703***
(0.693)
(2)
Logit
-0.099
(0.088)
0.715***
(0.204)
0.151
(0.188)
-2.046*
(1.045)
-0.067**
(0.031)
-10.036***
(2.096)
Dependent Variable: HybridIssued
(3)
(4)
Logit
OLS
-0.063
-0.007***
(0.095)
(0.003)
0.605***
0.016***
(0.208)
(0.005)
0.334*
0.006
(0.177)
(0.005)
-5.040***
(1.217)
-0.048
(0.034)
-7.689***
(2.346)
(5)
OLS
-0.002
(0.002)
-0.000
(0.000)
(6)
OLS
-0.008***
(0.003)
0.016***
(0.005)
0.006
(0.005)
0.029
(0.027)
0.000
(0.000)
(7)
OLS
-0.005*
(0.003)
0.016***
(0.005)
0.006
(0.005)
0.010
(0.027)
-0.000
(0.000)
Controls
YES
YES
YES
YES
YES
YES
YES
Firm FE
NO
NO
NO
YES
YES
YES
YES
Quarter FE
NO
NO
YES
NO
NO
NO
YES
Industry FE
NO
NO
YES
NO
NO
NO
NO
Sample
Public Rated
Public Rated
Public Rated
Public Rated
Public
Public Rated
Public Rated
Adj. R2
0.0708
0.138
0.254
0.0374
0.0328
0.0370
0.0480
No. Firms
202
202
196
202
1170
202
202
No. Obs
5825
5779
3219
5825
41310
5825
5825
This robustness test replicates our main analyses (Table 3) while restricting the sample to firms with an investment grade issuer rating (i.e. MeanRating ≥ -10). Robust
standard errors clustered by firms in parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level. Variable definitions are
provided in Appendix A.
40
Table 7: Robustness Test (alternative model specifications)
VARIABLES
DistanceFromIG
MeanRat
NegOutlook
NegWatchlist
EquityRatio
IntCover
IGSGDummy
NegOutDummy
NegWatchDummy
DebtQuota
(1)
OLS
(2)
HybridQuota
-0.003***
(0.001)
-0.000
(0.001)
0.012***
(0.004)
0.005
(0.004)
0.005
(0.017)
-0.000
(0.000)
-0.001*
(0.000)
-0.001*
(0.000)
0.001
(0.001)
0.000
(0.001)
0.017*
(0.009)
-0.000
(0.000)
Dependent Variable: HybridIssued
(3)
(4)
(5)
Without
Without
IGSG Dummy
Distance
MeanRat
-0.003***
(0.001)
-0.001
-0.000
(0.001)
(0.001)
0.012***
0.012***
0.012***
(0.004)
(0.004)
(0.004)
0.005
0.005
0.005
(0.004)
(0.004)
(0.004)
0.008
0.004
0.005
(0.017)
(0.014)
(0.017)
-0.000*
-0.000
-0.000*
(0.000)
(0.000)
(0.000)
0.007*
(0.004)
(6)
Outlook/Watchlist (1;0)
Coded
-0.004***
(0.001)
-0.000
(0.001)
0.003
(0.016)
-0.000
(0.000)
(7)
OLS
-0.003***
(0.001)
0.000
(0.001)
0.011***
(0.004)
0.005
(0.004)
-0.000
(0.000)
0.009***
(0.003)
0.009*
(0.005)
0.014
(0.014)
Controls
YES
YES
YES
YES
YES
YES
YES
Firm FE
YES
YES
YES
YES
YES
YES
YES
Quarter FE
YES
YES
YES
YES
YES
YES
YES
Industry FE
NO
NO
NO
NO
NO
NO
NO
Sample
Public Rated
Public Rated
Public Rated
Public Rated
Public Rated
Public Rated
Public Rated
Adj. R2
0.0387
0.660
0.0377
0.0388
0.0380
0.0373
0.0388
No. Firms
306
306
306
306
306
306
306
No. Obs
8694
8694
8694
8694
8694
8694
8694
Column (1) replicates our main specification (column (7) of Table 3). The remaining columns are based on alternative specifications of the variables of interest. The
dependent variable in column (2) is HybridQuota, which captures the firm’s aggregate offering amount of hybrid bonds outstanding in the respective quarter divided by
lagged total assets. In the remaining columns HybridIssued is used as the dependent variable. The remaining variables are defined in Appendix A. Robust standard errors
clustered by firms in parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level.
41
Table 8: Interest rate premium of hybrid bonds
VARIABLES
MaturityDiff
SizeDiff
LIBORDiff
IFRSEquity
Constant
Dependent Variable: Coupon Difference
(1)
Full
0.071***
(0.013)
-32.560
(30.350)
0.193
(0.381)
0.787*
(0.462)
1.543***
(0.449)
(2)
360 days
(3)
180 days
0.072***
(0.015)
-43.255
(33.489)
-0.481
(0.811)
0.863
(0.575)
1.587***
(0.580)
0.070***
(0.013)
-50.887
(40.987)
-2.049
(1.360)
0.901**
(0.438)
1.646***
(0.439)
FE
NO
NO
NO
Adj. R2
0.404
0.482
0.586
No. Firms
42
36
28
No. Obs
204
163
129
Each hybrid bond is matched to the most comparable conventional bond (in terms of size and offering date) issued by the same firm. The sample underlying the analysis in
column 2 (3) is restricted to matched “conventional bond-hybrid bond pairs” for which both securities are issued within a period of 360 (180). Robust standard errors in
parentheses; ***, ** and * indicate that the coefficients are different from zero at the 1%, 5% or 10% level. Variable definitions are provided in Appendix A.