A.Hybrid debt is a broad term for instruments that act like both debt and equity and often convert from a debt-like security to equity in a trigger scenario such as a financial crisis. Hybrid securities usually pay a coupon or dividend until their maturity date, in the same way as a loan or bond would, but can give the investor the option of converting them to shares when they mature. A common form used by banks are convertible contingent capital or CoCos, which increase their capital base without issuing additional equity and can be written off in a crisis.
Q.WHY IS THE BANK BUYING BACK DEBT?
A.The bank holds billions of euros of Eurozone sovereign debt and requires at least €2.9bn of fresh capital as it writes off the value of riskier assets such as Greek bonds. It still has to repay the €18.2bn bailout it received from the German government in 2008, is still 25 per cent state-owned, and may be forced to seek further aid if it cannot raise its regulatory capital ratio to nine per cent by 2013 as authorities demand. Buying back its hybrid debt at about half of the original sale price will create a capital gain and boost its regulatory capital ratio.