Subordinated (or hybrid) debt in Chile is ceasing to be an instrument associated mainly with banks and becoming a leading corporate tool. A couple of years ago, the picture was quite clear: BancoEstado and BCI issued subordinated or perpetual debt as part of their regulatory capital, with a logic closer to solvency and security than to financing growth. However, the format was not exclusive to the financial system: AES Andes had already shown that it could also be used in the corporate world. Today, this type of financing is being used more visibly by large issuers and IG: CMPC, Arauco (Celara), and SQM are putting it on the front page and validating that it can be an efficient solution at scale. 

Why now? Because the cost of money matters again. In investment-intensive companies, the dilemma is whether to finance investment or refinance without putting unnecessary strain on the balance sheet. A traditional senior bond makes "pure" debt more expensive and can put pressure on indicators; issuing shares, on the other hand, improves ratios but brings dilution and opportunity risk: shares can be the most expensive form of financing when the market does not pay for the story, or when the control structure does not want to open up. Subordinated debt appears to be a middle ground: it costs more in coupons than a traditional bond, yes, but it buys financial flexibility and, in many cases, improves the capital reading due to its subordination, long term, and certain contractual options. 

The cost-benefit ratio is simple: pay a higher spread today to gain flexibility tomorrow—diversify financing, ease pressure on metrics, and thereby maintain room for traditional borrowing when it is really needed. And, judging by the market response, the move has been well received: demand for these issues was strong, showing appetite for carry in well-rated credit even when the structure is not as simple as a common bond. 

For investors, the coupon is attractive, but it does not come free of charge. In addition to seniority, the key risk is extension: many prices assume that the issuer will repurchase or redeem the bond on the first possible date; if this does not happen, the effective duration increases and a significant price correction may follow. Added to this is the complexity of the coupon (adjustments and steps) and possible lower liquidity in times of stress. If the international context allows it (stable windows and contained volatility), we will see more issues in the short term. The condition is simple: discipline so that the coupon compensates for the complexity, and not confusing a good coupon with the absence of risk. 

DISCLAIMER.

Cristián Zañartu
Fixed Income Trader, Latin America – Money Desk