Hybrid Securities: Structuring, Pricing and Risk Assessment by Kamil Liberadzki, Marcin Liberadzki

By Kamil Liberadzki, Marcin Liberadzki

The e-book presents a complete research from mathematical, criminal and fiscal views at the pricing of hybrids.

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2. Exercise of call option Any call option may be exercised only at the sole discretion of the issuer, and not at the discretion of the investor (CRR Article 52[1][h]). Hence, hybrid securities qualified as AT1 capital instruments may be structured as a callable perpetual bond with a possible call at year 5 (CRR Article 52[1][i]). This format of hybrid is commonly referred to as a PerpNC5 security. Any such call, redemption or repurchase of instruments may not be exercised before five years after the date of the bond issuance.

For example, holders of CoCos will suffer losses ahead of equity holders when a ‘high-trigger’4 principal write-down CoCo is activated. This type of scenario is less likely with a low-trigger CoCo when equity holders already have suffered loss (ESMA, 2014). It has to be determined whether the AT1 category may be composed of two classes of financial hybrids: bond-based and share-based. The first class would be bonds equipped with very strong equity-like features, while the second class would be preferred shares.

E. an indicator of a bank’s financial soundness. An important concern about CoCos is that they would all convert at once, which could become a panic-inducing event of its own. Therefore it is proposed that CoCo conversions be made in several incremental stages. Another solution addressing the problem of automatic triggers is a contingent capital instrument in the form of so-called ‘capital access bonds’ (CABs) that give the issuer the unconstrained right to exercise the option to repay the bond in stock at any given time during the life of the bond.

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