Capital Markets

Sale of New Hybrid Security Stalled

The longer the SEC delays its approval of ''income-deposit securities,'' the more money issuers could lose if interest rates start to rise.
Stephen TaubJune 25, 2004

The Securities and Exchange Commission is delaying its approval of the sale of a new form of hybrid security because the SEC is concerned about how issuers calculated estimated dividends, according to Bloomberg.

The amount currently at stake is $9.4 billion from 17 issuers of the new security, which combines debt and equity features. The issuers reportedly include Davco Acquisition Holdings Inc., the largest franchisee of Wendy’s International Inc., and American Seafoods Corp., the largest U.S. catfish processor.

“The SEC is continuing to look at this through new-product goggles,” Richard Willoughby of Torys LLP, a U.S.-Canadian business-law firm, told the wire service. It has taken “longer than people expected.”

The new “income-deposit” securities were developed on the basis of income trusts that made up about two-thirds of all equity sales last year in Canada, according to Bloomberg.

So far, one publicly traded U.S. company, Volume Services America Holdings Inc., has sold the securities, according to Bloomberg. Most of the companies that have issued these securities, however, are owned by private-equity firms because they offer a way to sell stakes in slow-growth companies that may not be able to sell shares in a traditional initial public offering, the wire service notes.

Some of the largest underwriters of the paper include Royal Bank of Canada, CIBC World Markets, and Citigroup Inc., according to Bloomberg.

The longer the SEC delays its approval, however, the more it could cost companies if interest rates start to rise. The commission is concerned about the securities because the companies’ prospectuses say they will be able to make dividend payments based on previous earnings, says Bloomberg. The regulators want the companies to forecast future dividends from their projected earnings, bankers and lawyers told the wire service.

The approval is also being delayed over tax issues. Since the securities involve features of debt as well as equity instruments, companies are borrowing money to pay the dividends, the wire service explains. This move allows them to deduct the interest payments on the debt portion of the securities.