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Rocco Letterelli Marco Ticciati Muhammad Naeem. Three year Hybrid step up bond Pays a fixed coupon of 5% in the first year In the second year there would.

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Presentation on theme: "Rocco Letterelli Marco Ticciati Muhammad Naeem. Three year Hybrid step up bond Pays a fixed coupon of 5% in the first year In the second year there would."— Presentation transcript:

1 Rocco Letterelli Marco Ticciati Muhammad Naeem

2 Three year Hybrid step up bond Pays a fixed coupon of 5% in the first year In the second year there would be two cases At the time 1 if S1 >=S0 then the bank has a right to repay capital + premium OR To Transform the bond in 2 year regular bond with a coupon of 7%

3 If at time 1 S1

4 This kind of hybrid instrument, fill the gap left behind by the sum of supplementary capital to meet 100% core capital. They can be put forward in the limits of 15% of tier 1. Cost of capital with respect to the use of shares Interests expenditure are deductible like the common bonds LOWER WACC Less debt on balance sheet HIGHER RATING Neither debt nor equity small change of D/E ratio

5 t could be an alternative of the issuance of shares: No diluted shares among shareholders Less conflicts among shareholders Less decrease of ROE and P/e ratio then in case of capital charge Higher seniority than shares Less cost of funding with respect to shares No right to vote in the board of director

6 Banks can “surf” the trend of its income level It can give the money back when it can Because of good economic results or can can the money back for liquidity problems.. “results are good enough today but they could not be so good tomorrow and viceversa…”

7 Higher coupon in case of S1>S0 Bank needs to monitor the underlying Hedging problem: to hedge this position the bank has to find a counterparty in OTC market (for instance buying a binary call)

8 Investors with a ‘medium’ risk profile : they want a fixed cash flow but they want to benefit if the stock bank has a good performance. Notice that this bond is riskier than a regular bond because in case of default the owner of an hybrid bond is liquidated after bondholders and before shareholders Furthermore the bank has the right to repay the debt in advance and the investors have a benefit form that in terms of return


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