“Hybrid security” is a generic term used to describe a security that combines elements of debt securities and equity securities. Hybrid securities typically promise to pay a rate of return (fixed or floating) until a certain date, in the same way debt securities do. However, they also have equity-like features that can mean they may provide a higher rate of return than regular debt securities. In some cases, this is because they give the holder or the issuer an option to convert the hybrid securities into equity securities (typically ordinary shares), which will give the holder and “equity kicker” if the underlying security performs well or for the issuer a “capital kicker” if this is needed. In other cases it may be that the hybrid securities have equity-like risks attached and the issuer has to pay a higher rate of return to compensate investors for those risks.
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