MNI INTERVIEW: Hybrid Securities To Save EU Firms, Boost CMU

European Union governments have reacted positively to a proposal to create a new bloc-wide class of hybrid securities, incentivised with tax breaks, which would both support firms struggling with the impact of the Covid-19 pandemic and boost impetus towards a European Capital Markets Union, a senior finance industry group official told MNI.

The Association for Financial Markets in Europe has called on EU governments to grant tax allowances, capital gains tax exemptions and temporary changes to solvency rules for insurers to foster a hybrid financial instrument, which could help prevent a looming wave of corporate insolvencies as public sector support is phased out.

"The proposal has received positive feedback from public sector authorities," said Pablo Portugal, managing director at AFME.

"Incentives for investors to provide recapitalisation capital could be sharpened by introducing allowances for equity investments to better align the tax treatment of equity to debt financing," he added.

In addition, AFME has proposed time-limited capital gains tax exemptions to enable qualifying long-term investments to be rolled over. It has also suggested temporary adjustments to solvency requirements to encourage insurers to increase equity holdings, although although these would need careful calibration to avoid unintended consequences.

PRIVATE SECTOR-LED

A common EU-recapitalisation instrument, such as a preferred share, would have a standardised legal, accounting and tax base which could be used across the EU.

The investment banking industry sees close public-private sector collaboration as key to development of the product, including knowledge sharing of already successful equity-raising and hybrid instruments in some EU states.

"Recapitalisation schemes should be private sector-led, with governments playing a 'catalytic' or complementary role," Portugal said.

AFME's proposal would see public-private 'national equity recapitalisation forums' grouping investors, entrepreneurs, advisors and investment banks, which would assess the viability of candidates for recapitalisation, a topic which EU finance ministers are likely to increasingly focus on as fiscal support becomes more targeted in the second half of this year and into 2022.

We believe that an "EU standardised COVID-19 equity preference security or equity-like hybrid instrument could have broad appeal amongst institutional investors seeking debt-type risk profiles with better returns," said Portugal