If you look at the trade off on debt versus equity, here is what you are offered as the pluses by each side. With debt, you get tax benefits, reflecting the fact that interest expenses are tax deductible. With equity, you get flexibility, since you are not bound to make dividend payments, unless you have the earnings to cover those payments. It is every company’s dream to issue securities that offer all the flexibility of equity, while having the payments treated as debt by the tax authorities (thus giving you a tax benefit from any payments). If you are a regulated company, it is an even bigger bonanza if the regulatory authorities treat the financing as equity, since it allows you to meet regulatory capital requirements, while having equity research analysts not count the issuance as equity (with its consequent effects on per share earnings).
Can you actually issue a security that is debt to the IRS, equity with the regulatory authorities and with the company, and back to being debt, when viewed by analysts? Yes, and one example (among many) is surplus notes. Surplus notes are securities issues primarily by insurance companies, where the interest payments on the notes are made after all other contractual payments are made. If the insurance company does not have a surplus, it can defer payments on the surplus notes, without facing default. Here is how it is treated by the different entities:
In effect, an insurance company that issues surplus notes is getting the tax benefit of debt, without many of the normal consequences (lower ratings, regulatory disapproval and analyst backlash for having too much debt).