What is a hybrid?
‘Hybrid security’ is a generic term used to describe a security that combines elements of debt securities (eg bonds) and equity securities (eg shares). Hybrid securities typically promise to pay a rate of return (fixed or floating) until a certain date, in the same way a bond does. However, they also have share-like features that can mean they may provide a higher rate of return than bonds.
This is due to the higher inherent risk of these share-like features. These features may include reduced certainty as to the timing and amount of income generated from holding the securities, the potential for the securities to be converted into equity or early repayment at a time not beneficial to the holder, and the holder being subordinate to other creditors in the event of insolvency.