skills/capital-markets-issuance/references/convertibles-hybrids.md

# Convertibles and hybrids guidance

Use this reference for convertible notes, mandatory convertibles, preferred equity, hybrid capital, structured equity, and equity-linked issuance.

## Table Of Contents

- [Senior framing](#senior-framing)
- [Convertible notes](#convertible-notes)
- [Mandatory convertibles](#mandatory-convertibles)
- [Preferred equity and hybrid capital](#preferred-equity-and-hybrid-capital)
- [Structured equity / private capital](#structured-equity--private-capital)
- [Convertible/hybrid sizing](#convertiblehybrid-sizing)
- [Terms to include](#terms-to-include)
- [Investor objections](#investor-objections)

## Senior framing
Convertibles and hybrids sit between ecm and dcm. They are often best when straight equity is too dilutive, straight debt is too expensive or capacity-constrained, or volatility/rating treatment creates value. The risk is complexity, future dilution, investor-base mismatch, and signaling.

## Convertible notes
Best for public companies with equity upside, volatility, adequate borrow/hedge mechanics, and desire for low cash coupon.

Evaluate:
- current stock price, volatility, short interest, borrow availability;
- market cap, adv, free float, and existing convert overhang;
- coupon and conversion premium range;
- tenor, call features, settlement method;
- capped call economics and dilution cap;
- investor mix: outright vs convertible arbitrage;
- stock reaction and hedge pressure;
- use of proceeds and future refinancing need.

MD judgment:
- Convertibles are attractive when volatility lets the issuer monetize equity option value.
- Low coupon is not free; it comes with future dilution and hedge dynamics.
- Capped calls may be worth the cost if dilution optics matter.
- Heavy arbitrage demand can fill the book but may pressure shares.

## Mandatory convertibles
Best for acquisition financing, deleveraging, large-cap issuers, and situations where delayed equity issuance improves optics.

Evaluate:
- dividend/coupon cost;
- conversion range and premium;
- expected equity credit;
- accretion/dilution path;
- ratings impact;
- investor appetite for issuer equity;
- strategic rationale for delayed conversion.

MD judgment:
- Mandatory converts are useful when ratings or acquisition certainty require equity-like capital but immediate common issuance is unattractive.
- Investors must believe the equity story will support eventual conversion.

## Preferred equity and hybrid capital
Best for issuers needing equity-like capital without immediate common dilution, often regulated, utility, financial, infrastructure, or sponsor-backed issuers.

Evaluate:
- cash or pik dividend/coupon;
- perpetual vs dated maturity;
- redemption/call rights;
- ranking and subordination;
- governance/control rights;
- rating agency equity credit;
- regulatory capital treatment;
- investor universe and liquidity.

MD judgment:
- The headline coupon may understate governance, call protection, and control costs.
- Rating/regulatory equity credit can make hybrids strategically valuable despite high coupon.

## Structured equity / private capital
Best for difficult public-market windows, strategic investors, sponsors, or transitional stories.

Evaluate:
- liquidation preference;
- conversion mechanics;
- warrants;
- governance rights;
- anti-dilution protections;
- registration/resale rights;
- control implications;
- investor identity and signaling.

MD judgment:
- Structure can solve pricing but create long-term complexity.
- A premium strategic investor can validate the story; punitive terms may impair future market access.

## Convertible/hybrid sizing
Consider:
- proceeds need;
- market cap and adv;
- volatility and borrow;
- potential dilution;
- rating/covenant treatment;
- investor capacity;
- stock price support;
- future financing requirements.

Output:
- base size;
- upsize case;
- maximum advisable size before dilution/hedging becomes problematic;
- sensitivity to conversion premium and capped call.

## Terms to include
- principal/issue size;
- coupon/dividend;
- tenor/maturity;
- conversion premium and conversion price;
- call/put provisions;
- settlement method;
- capped call/hedge details;
- equity credit/rating treatment where applicable;
- fees and net proceeds;
- potential dilution scenarios.

## Investor objections
Prepare responses to:
- why not common equity or straight debt;
- dilution and capped call decisions;
- hedge pressure and borrow availability;
- growth/catalyst support for conversion;
- complexity and accounting/rating treatment;
- governance/control rights in preferred/structured equity.