Recent hybrid debt offerings of $1.2B by Canadian issuers

September 15, 2016

The recent offerings by TransCanada Trust and Emera Incorporated of U.S. $1.2 billion of hybrid debt (Hybrid) have created particular interest in this type of financing.  Hybrids are noteworthy for several reasons, including:

  • Hybrids have been around for many years and were originally popular with banks and insurance companies.  Regulatory changes arising from the financial crisis of 2008 and other factors have curtailed the use of Hybrids in the financial sector.  However, Hybrids remain attractive for many types of issuers.
  • The Hybrid qualifies for Basket “C” equity treatment by Moody’s Investor Service, Inc. and for “Intermediate Equity Credit” by Standard & Poor’s Ratings Services, meaning the principal amount of the Hybrid qualifies as 50% equity and 50% debt for credit rating calculations.  Therefore, Hybrids are especially attractive to issuers seeking to maintain their investment grade rating.
  • Although the Hybrid is treated as partial equity credit with rating agencies, it is treated as debt for Canadian income tax purposes, with the result that interest payable on the Hybrid is deductible by the issuer for tax purposes.
  • Hybrids are a cost-effective means of raising capital.  The after-tax cost of capital as a result of issuing a Hybrid is generally less than the aggregate cost of capital if a corporation issued the same amount as 50% debt and 50% equity.
  • Although the rating agencies place certain limitations on the amount of Hybrids that any corporation can issue, it is to a corporation’s advantage to maximize the use of Hybrids.

The ideal candidates for Hybrids are corporations with an investment grade rating and a constant need for capital or the need to finance a significant acquisition transaction or project.

Stikeman Elliott LLP acted as special tax counsel to TransCanada Trust with respect to its Hybrid offering (and on its $750 million Hybrid offering in 2015) and as counsel to the underwriters with respect to the Hybrid offering by Emera Inc.



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