Investments Innovative instruments

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innovative instruments

The funding costs of raising capital though an innovative instrument are usually lower than for equity.This is for three main reasons

•coupon payments on an innovative instrument may be tax deductible, unlike ordinary share dividends;

•although deeply subordinated,an innovative instrument would normally rank above ordinary shares in an insolvency;and

•the terms of an innovative instrument are likely to include an issuer call after,say,ten years,which is often linked to an increase in the cost of servicing the debt.This is referred to in the rules as a ‘step-up ’.Although the innovative instrument must be marketed as a perpetual instrument, such a call and step-up feature may signal to investors that the instrument may be redeemed at the call date.

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