The term hybrid debt is rather interesting, because it is not debt at all. This might confuse some individuals but it is actually something completely different. Essentially, it is a term many investors use in order to describe different securities that flow and move between debt and equity. These are rare securities but popular in financial markets. Some investment firms and other groups refer to hybrid debt as a hybrid security or even a hybrid investment, so when these different terms and phrases are used it is actually one in the same.
A hybrid debt is a rather specific investment instrument that has many of the same features as a traditional debt, like equity, stocks and bonds. Throughout the course of a normal business day (quarter or financial year) a business is going to receive some sort of debt. This usually occurred when they borrow money from other investors and they promise to pay the amount back at a later date.
This is similar to a regular loan you might receive, but instead it is given out to a business, which is seen to have more working collateral. When the business take out the money and promise to pay it back at a later date, they also have the ability to create bonds in the company. The business directly sells off equity of the business in order to sell shares to the investors into the company. Investors are able to use these shares in order to earn dividends form the company, in the same way a traditionally investor can purchase shares from the stock market and earn dividends throughout the year.
There are actually different kinds of hybrid debt, and one of the more popular options is known as a convertible bond. A convertible bond is a hybrid debt that originally started out as a debt, such as a bond (in a bond, the federal government is basically stating it owes you money and it is going to pay you back a set amount, with interest, for the investment)
. When this happens with a business though, the company usually includes the option that allows the investor to switch the bond over to a set number of stocks in the company, in order to turn it into equity (so you would convert the bond over to a stock). The investor might see this as a better investment, so instead of just waiting for the company to pay back the loan, with interest, the investor instead would own a particular portion of the company.
However, the investor does not have to make this particular transition, should they rather hold onto the bond (usually if the investor believes the company is not going to make that much money and instead just wants the loan payment with interest). Often times, the actual transition of the bond to a stock completely depends on the overall time frame of what the business is on and what it plans to do in the long run.
There are some benefits when it comes to a hybrid debt over other kinds of investments. For starters, it gives an investor the chance at potentially increasing the profit off of the loan. This is because the individual is able to give money for the convertible bond and then earn shares of the company at a discounted price over what another individual might pay for the shares. The investor could then sell the shares (or some of the shares) off for a much larger value than what the original bonds were for. Of course, when converting the bonds over to shares it doesn’t guarantee the individual is going to make any money off of the investment at all.
If the company were to eventually lose out and not prove capable of paying the money or investment back, but it is usually a desirable form of investment an individual might want to consider. It basically is something the investor needs to do a great amount of research in, possibly taking online accounting degree courses to become fluent in finance, and follow the business carefully in order to determine if it really is a wise decision to change the bond over to equity or if it is a better value to hold onto the bond.