In this primer report we explain how corporate hybrids work, what the advantages are for issuers, in addition to the new optionality and flexibility that they now have post rating agency updates. We also do an in-depth analysis of the different rating agencies’ methodologies (as to how equity credit is obtained and lost) while focusing on Moody's recent changes and implications for issuers and investors. We have included a historic evolution of hybrids' issuance volumes, bond performance as the instrument has become increasingly popular over time across countries, currencies and sectors. Importantly, we also provide some trade ideas at the end of the report.
In terms of performance, we'd highlight:
- Their remarkable performance since early 2023, with a -70bp YtD24 spread tightening on average
- EUR Corporate Hybrids have outperformed most other assets YtD (in terms of spread tightening) - with the
sole exception of AT1s (-106bp) and BBs (-99bp) - The sub-senior spread (SSS) compression in the bonds under our coverage has been c.300bps in the widest
trading hybrids (EDF), meaning that what used to be the tightest SSS 1Y ago is currently the widest SSS. - In our view, SSS is the closest proxy to extension risk. In the vast majority of sectors (ex-REITs), extension risk
has been non-existent, thus leading to this dramatic SSS compression. - YtD24: (i) Short-dated outperformed long-dated hybrids; (ii) On average, low-coupon hybrids outperformed vs
high-coupon and medium-coupon hybrid bonds; (iii) Ex-Utilities fared better vs Utilities' Hybrids. - Among the names we cover, ABESM, TELEFO and VW are the outperformers.