When Australia's Orica bought the international assets of explosives group Dyno Nobel for $902 million in late 2005, it was faced with a delicate funding problem. It had already used a lot of debt to fund other acquisitions and investments, and it was important to protect its strong BBB plus credit rating. Borrowing more might have placed that rating at risk. It raised $500 million in new equity through a rights issue, but issuing more equity would have been costly and reduced its earnings per share, an important calculation for investors. Fortunately, Orica had done a lot of planning ahead of time. According to Frank Micallef, general manager of treasury operations, the company had been working for four years on developing a new form of hybrid security that combined the elements of debt and equity and best suited the needs of both the investor and the issuing company. In early 2006, Orica introduced a new generation of hybrid securities, which it called Step-Up Preference (SPS) Securities. It offered to sell $400 million, but in the end demand was so great that it sold $516 million to institutional investors. The key features of these securities were that they were treated as equity for accounting purposes, and so strengthened its balance sheet, and were viewed as a form of subordinated debt by investors, who received a higher interest payment than they would for corporate bonds. The SPS offered a return of 135 points (or 1.35 per cent) over the prevailing bank bill rate-then 5.45 per cent. The payments are discretionary, but they can only be suspended if all dividend payments were suspended. The securities are also perpetual, but they can be redeemed by Orica at the conclusion of five years. If they are not redeemed by the company at this time, the interest rate payable on the securities, or the coupon, will "step up" by another 2.25 per cent. "It was a good transaction, " says Micallef. "It enabled us to minimise the ordinary equity that we could issue, and that helped in the earnings-per-share calculation. "Even though these instruments were more expensive than vanilla debt, we looked at it as a form of cheap equity rather than expensive debt." Outline the debt and equity situation of Orica at the time of the purchase of Dyno Nobel in 2005 Describe the features of Step-Up Preference Securities (SPS) created by the company Explain how the securities could be considered as equity for accounting purposes but as debt by investors