Hybrid Securities on Wikipedia
In a previous life, I led the Australian hybrid securities sales and trading business. Hybrid securities (“hybrids”) is a catchall phrase for financial instruments that rank (in order of claims) below vanilla debt and above common equity. Any company can issue hybrids.
Unlike vanilla debt and common equity, the terms and conditions (“T&Cs”) of each hybrid can differ considerably. For example, some are perpetual, some have a fixed redemption date and others have a complicated call structure. Some give the holders the right to convert into common shares; others have a forced conversion if the issuing company hits a negative trigger (usually indicating that the company is in distress). Some qualify as Tier 1 capital for banks, while others count as debt for credit rating purposes. This is just a sample of the possible T&Cs and as you can see, this makes it difficult to write a comprehensive summary of all the instruments classified as hybrids.
In this post, I review the Wikipedia article on hybrid securities according to the Wikipedia guidelines.
The Lead is succinct but factually incorrect. The definition of a hybrid is very narrow and fails to capture the broad array of T&Cs; for example, not all hybrids “pay a predictable (fixed or floating) rate of return or dividend”.
The article has eight sections. While they do provide general information about hybrids, there are key missing areas within the sections:
- Important terms: major terms not included are dividend stoppers, change of control, step-up margin, call dates and maturity.
- Traditional hybrids: this section only describes a convertible bond, which is not the only type of “traditional” hybrid. Moreover, this section is somewhat redundant and could be incorporated in the “Examples” section.
- Latest style of hybrids: This section illustrates only one latest style of hybrids even though there are at last three types.
- Usage and 6 Basket D security: These two sections provide current information on the Moody’s hybrids rating scale. However, Moody’s is not the only rating system that hybrid issuers pay attention to and S&P and Fitch both have different rating systems (not mentioned here).
- See also: While the article does provide some useful links, I have found articles on specific hybrids that are not linked to this page (e.g. “Contingent Convertibles”)
Furthermore, sections to add include:
- History of hybrids;
- Guidance on how to price a hybrid;
- Regulatory issues; and
- Descriptive statistics on the size of market and the types of issuers.
The article only cites one source entitled “Introduction to Canadian Convertible Debentures”. Although this is a published source, it is not sufficient:
- Firstly, there is only one source and it refers to one sentence in the article. The rest of the article is not sourced;
- Secondly, the source is specific to Canada. The T&Cs of a hybrid are highly influenced by the regulatory environment of the issuing company, and therefore a hybrid in Canada could be very different to a hybrid in Europe; and
- Thirdly, there are a number of newspaper articles, scholarly articles and textbooks that discuss hybrids, none of which are used here.
The article is written from a neutral point of view. The contents of the article are factual and the authors do not make any recommendations as to whether hybrids are a good investment or not.
The article is readable and well written. Key terms are bolded and bullet points are used for clarity and succinctness. Paragraphs are no longer than six lines long, making it easy to read and keeping the user engaged. The grammar also appears to be correct.
The language, layout and format of the article adhere to the Wikipedia Manual of Style. There have only been four edits made to the article since inception.
The article includes one illustration, which is a photo of an old hybrid security certificate. While somewhat interesting, the certificate is outdated and not relevant to the discussion. A more useful illustration could be a sample term sheet; or an infographic showing how hybrids fit into a company’s capital structure.
In conclusion, the Wikipedia article on hybrid securities is incomplete. The article could be improved by filling in key missing sections, providing multiple reputable sources and using a more relevant illustration.