Corporate Hybrids: The What, Why and Rise

Corporate hybrid bonds are subordinated, long-dated, often perpetual, securities issued predominantly by IG-rated companies to diversify capital structures while receiving favorable equity treatment by rating agencies.

Spurred by Moody’s revised methodology for ascribing equity credit to hybrid instruments, USD corporate hybrid issuance swelled fivefold year-over-year to $35 bn in 2024, while EUR issuance doubled to €29 bn following depressed volumes over 2022-2023. The market for outstanding dollar-denominated hybrids stands at $117 bn, while outstanding euro-denominated hybrids total €158 bn.

Corporate hybrids gained popularity in the European debt capital market following the GFC due to their attractive characteristics for both borrowers and investors. From a supply perspective, hybrids appeal to companies because of their tax-deductible coupons, ability to reduce the weighted average cost of capital, maintain favorable debt-to-capital ratios for credit ratings, enhance balance sheet flexibility and diversify funding sources. On the demand side, investors benefit from investing in IG quality issuers while achieving yields and returns commensurate with HY-rated bonds, owing to the subordination risk.