The bad news for shareholders and bondholders of the crisis-hit company Hochdorf came just over a week ago. The dairy processor announced that its operating business, including its subsidiary Hochdorf Swiss Nutrition (HSN), would be sold to financial investor AS Equity Partners. The holding company is now under provisional debt restructuring, which protects it from creditors.

The sale proceeds flowing into the holding company amount to just CHF 15.5 million, as the buyer assumes a CHF 67 million syndicated loan from banks. The transaction still needs to be approved by the extraordinary general meeting of Hochdorf Holding shareholders on September 18.

Hochdorf Shares: Worthless and Soon to Be Delisted

At this meeting, a motion will also be put forward to delist the shares. The registered shares, which are (still) traded on the SIX Exchange, have lost 95 percent of their value since the beginning of the year and are currently trading around 70 centimes. In 2017 and 2018, the stock price temporarily rose above 300 francs.

In its announcement, the company stated that the proceeds from the sale of HSN would not be sufficient «to cover the substantial legacy financial liabilities, particularly the 125 million francs hybrid bond issued in 2017 and the associated outstanding interest payments.» Additionally, the holding company had to fully write off intercompany loans totaling 182 million francs as of June 30, 2024, due to the signing of the sales agreement for its subsidiary, leading to over-indebtedness.

Hochdorf Hybrid Bond: From 25 to 5 Percent

As a consequence, the holding company applied for provisional debt restructuring, which was immediately approved by the court. The creditors of Hochdorf Holding, including the bondholders of the aforementioned hybrid bond, do not need to take any action at this time, according to the statement.

It is clear that Hochdorf’s shareholders will have to write off their investment. Bondholders are also likely to lose a large portion of their stake. The bonds are currently trading at 5 percent, down from 25 percent in early August.

Cheaper Than Equity, More Expensive Than Regular Bonds

The Hochdorf case highlights the instrument of hybrid corporate bonds, which belong to the broader family of hybrid bonds. Hybrid bonds contain elements of both debt and equity, with one or the other aspect dominating depending on the structure and market conditions. From the issuer’s perspective, they are generally cheaper than equity but more expensive than regular bonds.

In banking, regulation is a key driver behind the issuance of hybrid bonds. This is where most hybrid bonds are found. The now well-known Additional Tier 1 (AT1) bonds of Credit Suisse, which were fully written off by the Swiss Financial Market Supervisory Authority (Finma) following the UBS takeover, also fall into this category. Internationally, the AT1 market quickly recovered after the Credit Suisse incident, although there have been no new issuances in Swiss francs since.

Subordinated, but No Automatic Conversion to Equity

Like hybrid bank bonds, corporate hybrids are subordinated, with very long or perpetual maturities (with the issuer having a call option) and optional interest payments, meaning the payments can be deferred or skipped. If the issuer does not exercise the call option, the interest rate often switches (usually from fixed to variable).

However, unlike AT1 bonds, corporate hybrids do not automatically convert into equity in a stress scenario (nor are they written off by regulators). Nevertheless, they are subordinated to regular bonds and other claims within the same class.

A Different Motivation Than Banks

For hybrid bank bonds, the financial crisis marked the birth of the instrument, as regulators worldwide significantly tightened capital requirements in its aftermath. For corporate hybrids, regulation plays no role. Companies opt for this form of financing because it is cost-effective, preserves equity, strengthens credit ratings (for senior bonds), offers tax advantages, and allows for flexible structuring.

This flexibility, and the lack of standardization, means investors must carefully scrutinize the terms and conditions in each prospectus to avoid unpleasant surprises. At least with corporate hybrids, there is no regulator who can wipe out the bonds with a single stroke of the pen.

Two Sides of the Coin

In the Swiss market, corporate hybrids have remained a narrow niche. Currently, besides Hochdorf, the power company Alpiq and frozen foods specialist Aryzta have such bonds outstanding. In the past, companies like Hero, Siegfried, and Valora also used this instrument for financing.

In recent media coverage of the Hochdorf case, it has been suggested that the financial burden of the hybrid bond was a factor in the company’s downfall. However, had Hochdorf opted for a regular bond in 2017, the situation would not have been much different. The payment of the slightly lower coupon could not have been deferred (as it was in Hochdorf’s case), and the moment of truth would have arrived at maturity at the latest.

It is important to highlight that corporate hybrid bonds can alleviate a company's financial stress and, in some cases, ensure its survival. Aryzta provides a prime example of this in the Swiss market.