Hybrids have become the offering of choice in the retail market now that the institutional market has been roiled by the National Association of Insurance Commissioners' decision to classify some hybrids as common stock. According to Corporate Financing Week, a CIN sister publication, financings are being downsized and retailored to suit the needs of small investors.
While some issuers, such as US Bancorp, have tapped the retail market recently, the current choppiness and uncertainty in the institutional market is making it a necessity for some. Last week, Lincoln National sold $275 million of 60-year 6 3/4% capital securities that are callable in five years. The transaction is noticeably smaller than the usual $500 million to $1 billion hybrid transactions financials have brought to the market recently, and came well below estimates by bankers who knew of the deal earlier in the week.
The subordinated bonds of Lincoln National have a number of equity-like features such as a 60-year tenor and mandatory deferral features that win them a high equity treatment from rating agencies. Morgan Stanley, Citigroup, Merrill Lynch, UBS and Wachovia acted as joint bookrunning managers.
The securities also carry retail-friendly features. Each security has a par value of $25 instead of the usual $1,000 increments. The retail version is callable in five years, as opposed to 10 for qualified institutional buyers. Another differentiating feature between the two types of hybrids lies in the call structure. Retail-oriented securities are callable at par if there are any special events, such as a determination that the underlying debt portion of the security is deemed not to be tax deductible. Institutional deals are usually callable at a premium or have make-whole agreements for such events, said a partner at one of the New York law firms working on these transactions.
