Following Standard & Poor's revision on Tuesday of how hybrid securities are to be treated, many of Australia's largest companies are now left re-evaluating their balance sheets, with enormous amounts of equity retrospectively being turned into debt.
Hybrids, which hold characteristics of both debt and equity, were very appealing to companies as they could be treated as equity for ratings purposes, but were regarded as deductible debt for taxation purposes. Furthermore, they are much cheaper than equity as they carried debt-like interest rates.
After a flood of hybrid securities were issued last year however, the S&P announced in November that they would be reviewing the way in which they were to be treated, leaving extra pressure on the balance sheets of companies such as Crown Limited (ASX: CWN), Tabcorp Holdings (ASX: TAH) and Caltex Australia (ASX: CTX).
Santos Limited (ASX: STO) and Origin Energy (ASX: ORG) are other companies who hold a large number of hybrid securities. Santos announced that its entire $1.2 billion issue would be reclassified as debt, which will likely see the company's credit rating downgraded. Meanwhile, Origin will have 50% of its $1.5 billion in facilities remain classed as equities, according to The Australian.
Despite the enormous recognition of debts however, both companies remain adamant that they will not require fresh equity raisings to get them through a period of high capital expenditure – a belief that is supported by analyst Adrian Wood from Macquarie Securities.
The changes have been nervously anticipated since last year's announcement that they would be reviewed.
Foolish takeaway
The S&P's decision to retrospectively change the rules regarding hybrid securities has disappointed companies, however, analysts remain confident that the future of hybrids has not been compromised. Will Farrent, the head of debt capital markets at Credit Suisse, stated that this is "not the death of hybrids by any means", suggesting that the new hybrid treatments will still provide many issuers with positive solutions.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
