The trillions of dollars thrown at pandemic-ravaged companies — from both the state and private investors — are not enough. The Association for Financial Markets in Europe, which speaks for the industry, reckons the answer to plugging an estimated €600bn shortfall lies in creating a new type of pan-European hybrid instrument.
Depending where you sit, quasi equity offers the best or worst of both worlds: debt-like characteristics and tax profile with an equity-style exposure to bumps and jumps. Preference shares also enable issuers, such as company founders, to raise capital without ceding control via voting rights.
Various instruments, including old faithfuls such as payment-in-kind notes (PIKs) have enjoyed a resurgence in the pandemic. All told, European companies have raised about €57bn of hybrids, according to numbers collated by AFME and consultancy PwC. That is half as much again as the average raised in each of the preceding three years.
Creating something new that operates on an equal tax, accounting and legal footing across the EU sounds appealing. It also seems reasonable to build something specific for the swaths of companies that fall between the cracks of state aid and private money. Even with this largesse, AFME reckons one in 10 European companies only have sufficient cash to last six months.
Still, there are plenty of reasons for scepticism. The EU’s capital market union project has stalled. Bankers have self-interested reasons for conjuring up new instruments. Precedent is not encouraging. Take banks’ Additional Tier 1 bonds, a type of contingent convertible (coco) bond. Introduced after the financial crisis to repair balance sheets, equity-like AT1s carry high coupons and perpetual maturities, negating the need to repay the principal.
These instruments, which can be written off if the lender trips certain thresholds of viability, have been tested by the pandemic. Deutsche Bank balked at exercising its option to redeem $1.25bn of AT1s in April, spooking investors.
A pan-European solution is an enticing prospect — more helpful than fixes via individual national capital markets. But forcing new classes of securities into existence has not worked out so far.
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