For financial institutions and real estate investment trusts (REITs), hybrid securities are a familiar tool and a regular component of the capital structure. Corporates have only begun using hybrids since the ratings agencies changed their guidelines, which enabled instruments to be structured that receive significant equity credit and a tax deduction. The corporate market is already established and liquid, but corporates so far have focused on using hybrids to relieve ratings pressure and strengthen their balance sheets. They are not yet proactively optimizing their capital structure with hybrids but we expect this to be a trend in 2007 and beyond, as corporates assess the value of hybrids in reducing equity funding required for acquisitions and in upsizing share repurchases. We examined the use of funds provided in the documentation of 211 issues in 2005 and 2006.

1. Strategic Capital Advisory
Hybrid
Capital
Authors
Jamie Ballingall
Strategic Capital Advisory
Merrill Lynch
+1 212 449 8792
jamie_ballingall@ml.com
Adrian Crockett
Head of Strategic Capital Advisory
Merrill Lynch
+1 212 449 9920
adrian_crockett@ml.com
Why Have Companies
Been Issuing Hybrids?
January 2007
10033jan1-IBK Research Report.indd 2 1/24/07 11:18:18 AM

2. i Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Acknowledgments
We would like to thank Kumar Ampapathini and Elliot Wittlin of Merrill Lynch Corporate Finance, as well as Jill
Schildkraut-Katz, Patrick Finn and Michael Cyprys of Merrill Lynch Capital Products Structuring, for their
assistance in preparing the data and their valuable comments. Of course, any remaining errors are our own.

3. Strategic Capital Advisory ii
Why Have Companies Been Issuing Hybrids?
January2007
Executive Summary
For financial institutions and real estate investment trusts (REITs), hybrid
securities are a familiar tool and regular component of the capital structure.
Corporates have only begun using hybrids since the ratings agencies changed
their guidelines, which enabled instruments to be structured that receive
significant equity credit and a tax deduction. The corporate market is already
established and liquid, but corporates so far have focused on using hybrids to
relieve ratings pressure and strengthen their balance sheets. They are not yet
proactively optimizing their capital structure with hybrids but we expect this
to be a trend in 2007 and beyond, as corporates assess the value of hybrids in
reducing equity funding required for acquisitions and in upsizing share
repurchases.
We examined the use of funds provided in the documentation of 211 issues in
2005 and 2006. The chart below provides a breakdown of the uses.
Use of Funds
Financial
Institutions REITs Corporates
Repurchase Debt
General Corporate Purposes
Finance Acquisition
Fund Pension Shortfall
Strengthen Balance Sheet
Repurchase Stock
Invest in Subsidiary
Make General Investments
Pay Dividends to Shareholders
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006

4. iii Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Contents
Table of Contents
Overview 1
Use of Funds and Issuance Rationales 3
Financial Institution Use of Hybrid Capital Funds 4
REIT Use of Hybrid Capital Funds 5
Corporate Use of Hybrid Capital Funds 6
So What Does All This Mean? 8
Table of Figures
Figure 1 – Global Hybrid Issuance by Sector, 2005 & 2006 1
Figure 2 – Use of Funds Data Sample 2
Figure 3 – Major Hybrid Capital Issuance Rationales 3
Figure 4 – Mapping of Use of Funds to Underlying Issuance Rationales 3
Figure 5 – Financial Institution Use of Hybrid Capital Funds 4
Figure 6 – REIT Use of Hybrid Capital Funds 5
Figure 7 – Corporate Use of Hybrid Capital Funds 6
Figure 8 – Use of Hybrid Capital Funds for USA and Europe 7

5. Strategic Capital Advisory 1
Why Have Companies Been Issuing Hybrids?
January2007
Overview
In past few years we have seen a dramatic increase in the size of the hybrid
capital market. Initially, issuance was largely by financial institutions and driven
by regulatory capital considerations. However, the last two years have seen a
notable pick-up in the use of hybrids by corporates, with approximately $11.5bn
of global corporate hybrid issuance in 2005 and $16.8bn in 2006.1
Figure 1 – Global Hybrid Issuance by Sector, 2005 & 2006
0
10
20
30
40
50
HybridIssuance($bn)
Financial Institutions REITs Corporates
Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006
0
10
20
30
40
50
HybridIssuance($bn)
Financial Institutions REITs Corporates
Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
In general, we consider a hybrid security to be an instrument with equity-like
and debt-like features, such as Merrill Lynch's Income Capital Obligation
NotesSM (ICONs)2 or preferred stock (whether issued directly or through a
special purpose vehicle). Typically a hybrid has the following features:
Long maturity or perpetual
Subordinated to debt but senior to equity
Deferrable or non-cumulative payments
Replacement language
Note that this definition excludes convertible bonds.
Our forthcoming paper3 provides a list of the theoretical and practical benefits of
hybrid issuance and an overview of the circumstances in which issuing a hybrid
is an attractive option for corporates. This paper examines the use of proceeds
stated in issuance documentation for financial institutions, REITS and corporates
over the last two years and, for corporates, compares them to the reasons listed
in our forthcoming paper.
1 All currency amounts in this paper refer to U.S. Dollars (USD). Other currency amounts were converted to USD at the
prevailing market rate at the end of 2006.
2 "Income Capital Obligation Notes" is a service mark of Merrill Lynch & Co., Inc.
3 Why Should Corporates Issue Hybrids?

6. 2 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Figure 2 provides a breakdown of the issues included in the analysis.
Note that not all the issues that took place in 2005 and 2006 provided use of
funds information and they are excluded from the table below.
Figure 2 – Use of Funds Data Sample
Sector Region Period
No. of
Issues
Issuance
Volume
$ bn
Financial Institutions USA4 2005 & 2006 113 60.2
REITs Global 2005 & 2006 56 6.8
Corporates Global 2005 & 2006 42 25.0
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
4 Includes Bermuda based insurance and reinsurance issuers.

7. Strategic Capital Advisory 3
Why Have Companies Been Issuing Hybrids?
January2007
Use of Funds and Issuance Rationales
Our extensive discussions with issuers led us to compile a list of issuance
rationales, some of which are appropriate only for certain types of issuer. A
comprehensive discussion of these rationales as they apply to corporates will be
contained in our forthcoming paper.5
Figure 3 – Major Hybrid Capital Issuance Rationales
Financial
Institutions
Real Estate
Investment
Trusts
(REITs) Corporates
Provide Regulatory Capital
Relieve Ratings Pressure
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Substitute for Equity
Diversify Funding Sources
Relieve Accounting Ratio Pressure
It is not possible to observe directly what caused an issuer to choose hybrid
capital, but it is possible to collate the “Use of Funds” from the documentation of
each issue. We can then map the reported use of funds to underlying issuance
rationales according to the diagram below.6
Figure 4 – Mapping of Use of Funds to Underlying Issuance Rationales
Strengthen Balance Sheet
Repurchase Debt
Repurchase Stock
Finance Acquisition
Fund Pension Shortfall
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Relieve Ratings Pressure7
Strengthen Balance Sheet
Repurchase Debt
Repurchase Stock
Finance Acquisition
Fund Pension Shortfall
Lower Cost of Capital
Increase Acquisition Firepower
Plug a Pension Shortfall
Relieve Ratings Pressure7
5 Why Should Corporates Issue Hybrids?
6 We were unable to map the use of funds General Corporate Purposes, Make General Investments, Invest in Subsidiary and
Pay Dividends to Shareholders cleanly to an underlying rationale. Similarly, none of the uses of funds gave any insight into
the underlying rationales of: Substitute for Equity, Provide Regulatory Capital, Diversify Funding Sources or Relieve
Accounting Ratio Pressure.
7 In this paper we intend Relieve Ratings Pressure to include unrated entities that are seeking to mitigate covenant constraints
on loans or private placements.

8. 4 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Financial Institution Use of Hybrid Capital
Funds
We examined each of the 113 financial institution hybrid issues, representing
$60.2bn of capital, which occurred in the USA between January 2005 and
December 2006 inclusive and tabulated the use of funds. In many cases an issue
had more than one use of funds, in which case each use was given proportional
credit.8 For example, if a one billion dollar issue had uses “General Corporate
Purposes” and “Repurchase Debt” then $500 million was counted as General
Corporate Purposes and $500 million as Repurchase Debt.
Figure 5 – Financial Institution Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
General Corporate Purposes 40.1 73
Repurchase Debt 6.1 12
Finance Acquisition 5.6 12
Repurchase Stock 5.4 10
Invest in Subsidiary 1.5 2
Make General Investments 1.3 4
Pay Dividends to Shareholders 0.3 1
Strengthen Balance Sheet - -
Fund Pension Shortfall - -
Total $60.2bn 113
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
General Corporate Purposes9 is the clearly dominant reason. We interpret this to
mean that hybrids have become a regular source of capital for many financial
institutions. Discussions with issuers indicate that this adoption has been driven
by the treatment of hybrids as regulatory capital.
The other three significant uses of funds are Repurchase Debt, Finance Acquisition
and Repurchase Stock. Interestingly, Repurchase Debt and Repurchase Stock both
represent a proactive rebalancing of capital structure.
8 The same method is applied for analysis of REITs and corporates. This proportional approach, combined with rounding, means
that some columns in the figures may not reconcile with the totals on a one decimal place basis.
9 Many US bank-holding companies have been issuing hybrids to refinance callable traditional Tier 1 trust preferreds at more
attractive prices and with upgraded rating agency benefits. We believe these transactions are being reported as General
Corporate Purposes in documentation.

9. Strategic Capital Advisory 5
Why Have Companies Been Issuing Hybrids?
January2007
REIT Use of Hybrid Capital Funds
In 2005 and 2006, there were 56 hybrid issues by REITs representing $6.8bn of
capital raised.
Figure 6 – REIT Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
Repurchase Debt 3.3 26
General Corporate Purposes 2.3 16
Make General Investments 0.7 5
Finance Acquisition 0.6 8
Repurchase Stock - -
Invest in Subsidiary - -
Pay Dividends to Shareholders - -
Strengthen Balance Sheet - -
Fund Pension Shortfall - -
Total $6.8bn 56
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
For three of the four significant uses, Repurchase Debt, Make General Investments
and Finance Acquisition, hybrids can be seen as an alternative to debt.

10. 6 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
Corporate Use of Hybrid Capital Funds
The use of hybrid capital for corporates lagged that of financial institutions.
Financial institutions always had a strong rationale in regulatory capital, but
corporates lacked this major driving factor until recent developments in rating
agency equity credit created an impetus for tax deductible corporate issuance.
Over the last two years there have been approximately 42 corporate hybrid deals
globally and our examination of these deals outlined the following uses of funds.
Figure 7 – Corporate Use of Hybrid Capital Funds
Use of Funds Notional Notional # of Issues
Repurchase Debt 8.9 16
General Corporate Purposes 8.4 15
Finance Acquisition 3.5 5
Fund Pension Shortfall 1.7 1
Strengthen Balance Sheet 1.5 2
Repurchase Stock 0.8 2
Invest in Subsidiary 0.1 0
Make General Investments 0.0 1
Pay Dividends to Shareholders - -
Total $25.0bn 42
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
While the generic rationale General Corporate Purposes still scores highly, it is
interesting to note that Repurchase Debt is the highest scoring rationale. Its
position is supported by two related rationales: Strengthen Balance Sheet and Fund
Pension Shortfall. All three of these show hybrids being used as a mechanism to
deleverage. Finance Acquisition appears as the third choice.
We interpret these results to mean that relieving ratings pressure, either caused
by an acquisition or otherwise, is the dominant rationale for hybrid issuance for
corporates. This conclusion is supported by the low score of Repurchase Stock.10
Proactive capital structure management would likely yield issues with both
Repurchase Debt and Repurchase Stock as uses of funds. We observed no such
issues in our sample.
Certain markets – for instance, Australia and Europe – were early adopters of
corporate hybrids, while markets that are generally considered more financially
sophisticated such as the USA have lagged behind in embracing this new
technology. Given these fundamental differences we then examined the rationale
based on a geographic split.11
10 The number of corporates that identified Repurchase Stock as the major use of proceeds could be impacted by tax legislation in
some jurisdictions, which may limit the ability of a firm to claim interest deductions on debt or quasi debt where it has been
used to finance a share repurchase.
11 Insufficient data was available for Asia to conduct meaningful analysis.

11. Strategic Capital Advisory 7
Why Have Companies Been Issuing Hybrids?
January2007
Figure 8 – Use of Hybrid Capital Funds for USA and Europe
USA
OtherRepurchase
Stock
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt43%
34%
8%
13%
2%
OtherRepurchase
Stock
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt43%
34%
8%
13%
2%
Europe
Strengthen
Balance Sheet
Fund Pension
Shortfall
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt
31%
34%
17%
9%
9%
Strengthen
Balance Sheet
Fund Pension
Shortfall
Finance
Acquisition
General
Corporate
Purposes
Repurchase
Debt
31%
34%
17%
9%
9%
Source: Merrill Lynch Capital Products Structuring, Hybrid Capital Issuance Database, 2005 & 2006
Although there are some differences between the markets, the three major global
uses of proceeds (Repurchase Debt, General Corporate Purposes and Finance
Acquisition) still dominate. As the number of corporate issues increases we expect
the range of uses of funds to broaden.

12. 8 Strategic Capital Advisory
Why Have Companies Been Issuing Hybrids?
January2007
So What Does All This Mean?
For financial institutions and real estate investment trusts (REITs), hybrid
securities are a familiar tool and regular component of the capital structure.
Corporates have only begun using hybrids since the ratings agencies changed
their guidelines, which enabled instruments to be structured that receive
significant equity credit and a tax deduction. The corporate market is already
established and liquid, but corporates so far have focused on using hybrids to
relieve ratings pressure and strengthen their balance sheets. They are not yet
proactively optimizing their capital structure with hybrids but we expect this to
be a trend in 2007 and beyond, as corporates assess the value of hybrids in
reducing equity funding required for acquisitions and in upsizing share
repurchases.

13. Strategic Capital Advisory 9
Why Have Companies Been Issuing Hybrids?
January2007
Disclaimer
Unless otherwise specifically indicated, the contents of this document are for information purposes only and
should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities, futures, options, or
investment products, an official confirmation of any transaction, or as an official statement of Merrill Lynch. This
document is not intended for distribution to, or use by, any person or entity in any location where such
distribution or use would be contrary to law or regulation, or which would subject any Merrill Lynch affiliate to
any registration requirement within such location.
The information contained in this document is obtained from various public sources that we consider to be
reliable. However, we have not independently verified such information nor do we represent that it is accurate or
complete; accordingly, it should not be relied upon as such. Merrill Lynch makes no representation and shall
have no liability in any way to you or any other entity for any loss or damage, direct or indirect, arising from the
use of this information.
Any transactions terms or prices mentioned herein are indicative only. Assumption changes may materially
impact returns. Opinions expressed are the present opinions of Merrill Lynch Strategic Capital Advisory only and
may be changed at any time without notice. Merrill Lynch or any of its affiliates may from time to time
participate, invest in transactions or the markets, have long or short positions in, and buy or sell, securities,
futures, options or swap derivatives identical with or related to those referred herein as well as perform
investment banking or other services for, or solicit investment banking or other business from, any company
mentioned herein. Past performance is no guarantee of future results. Certain transactions, including those
involving swap derivatives, give rise to substantial risk and are not suitable for all investors.
Merrill Lynch prohibits (a) employees from, directly or indirectly, offering a favorable research rating or specific
price target, or offering to change such rating or price target, as consideration or inducement for the receipt of
business or for compensation, and (b) Research Analysts from being compensated for involvement in investment
banking transactions except to the extent that such participation is intended to benefit investor clients.
IRS Circular 230 Disclosure: Merrill Lynch does not provide tax, accounting or regulatory advice. Any tax
statements contained in this document or any of its attachments were not intended or written to be used, and
cannot be used, for the purpose of avoiding U.S., federal, state or local tax penalties. Please consult your advisor
as to any tax, accounting or legal statements made herein.

14. This document has been approved and/or communicated by Merrill Lynch. The services described in
this document are provided by Merrill Lynch or by its subsidiaries and/or affiliated in accordance with
appropriate local legislation and regulation.
© January 2007
10033jan1-IBK Research Report.indd 1 1/24/07 11:18:15 AM