Hybrid Instruments and the Role played by Credit Rating Agencies and IAS 32

Abstract: Financial instruments with characteristics of equity (FICEs) are complex securities that have features lying in between equity and liability, making their classification particularly challenging. This paper has therefore explored several under-researched areas related to the issuance of FICEs by publicly trading European companies. To do so, this study has collected data from 587 European companies. We then analyzed the frequency and the composition of these hybrid instruments found in our sample. We found certain industries within specific countries to have a particularly high presence of FICEs, such as Swedish Real Estate companies. The study also relates its analysis to the assessments made by Credit Rating Agencies (CRAs) on these hybrid instruments, as they are found to assign "equity credits" to FICEs. We also found that several hybrid securities have provisions in their prospectuses for the early redemption of them, in the case of changes in the equity credits assigned by the CRAs. The study then draws conclusions on firms' abilities to select one or the other classification for the IFRS-aligned target capital structure, while having the same CRAs-assessed equity credits.