A sort of capital that is formed from, and consists of, both equity and debt components. In other words, it is constructed out of equity capital and debt capital:

Hybrid capital = equity capital + debt capital

Equity capital is that portion of an entity’s equity that has been raised by the issue of shares of stock in the entity to shareholders, usually for monetary amounts (cash). In other words, it is the amount of capital that corresponds to the amount of money the owners have invested in the entity as mainly represented by common and/ or preferred shares. The equity capital of an entity may be increased by issuing (selling) new shares (new issue) or by the so-called bonus issue: transferring an entity’s own funds from unrestricted equity to equity capital.

Debt capital is that component of capital financed by borrowed funds (debt)- usually perpetual or very long-dated. It is a form of financing that allows an entity to raise funds by borrowing money from the public (e.g., creditors or investors). As a borrower or seeker of external sources of funds, an entity must repay the borrowed amount (the debt) along with interest over a specific period. Debt capital is a source of short- to long-term financing that a business taps into in order to finance its operations (usually for growth purposes).

Hybrid capital has the characteristics of both components. It behaves like equity and can exhibit the behavior of debt. The debt components provides for leverage abilities and certain tax reliefs, forming with the equity component a complementary hybrid mix of financial resources.

Hybrid capital, per se, is subordinated, and therefore provides high relative yields. It may be embedded with features that enable issuers to cease payment of interest or dividends under certain conditions.