Hybrid Securities: Unraveling a Unique Opportunity
From setbacks to strategic buybacks, how one brand defied market expectations
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.
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