Hybrid Securities: Unraveling a Unique Opportunity

From setbacks to strategic buybacks, how one brand defied market expectations

Executive Summary:

In this post, I discuss a global market leader that has made a successful business turnaround following a decade of botched, aggressively-financed acquisitions. Despite facing immense recent challenges, including COVID and the Ukraine conflict, the company has shown resilience under its new leadership. With a clear emphasis on organic growth, effective execution, and a renewed corporate culture, the company’s trajectory has never looked brighter.

Capitalizing on its recent success, management has demonstrated prudent capital allocation, especially concerning management of its existing debt. Specifically, the company has been actively managing down its expensive hybrid securities. These instruments, which have characteristics of both debt and equity, were initially introduced to strengthen the company’s capital structure. However, over time, the costs associated with these instruments became significant. The company is now proactively repurchasing these hybrids and has clearly indicated refinancing them in the near future.

In my base case, I think one can earn a 12-14% return with relatively low, uncorrelated risk, assuming these instruments are called/repaid/refinanced over the next 12 months. I think this opportunity exists because of the relatively small issue size as well as the company’s checkered history, which I believe is unjustified given its recent transformation.

Disclosure: The information provided is for informational purposes only and should not be considered as investment advice. Any investment decisions made based on the information provided are at your own risk. It is essential to conduct your own research and consult a qualified financial advisor before making any investment decisions. Investing involves risks, and past performance is not indicative of future results. By using this information, you acknowledge that you are responsible for your own decisions and release me from any liability. Seek professional advice tailored to your financial situation and objectives.