By Marc Lacraz, Vianney Hocquet, Daniela Savoia - Portfolio Managers in Hybrid Corporate Debt at Edmond de Rothschild Asset Management
2024: The Year Corporate Hybrid Went Global
The corporate hybrid market, historically European-centric, has reached the global stage, providing investors and issuers once in a decade type of opportunities. This asset class has taken off since 2012 and has become one of the fastest growing credit segments. Ultimately, the instrument solved a real need for issuers: they could now issue non-dilutive equity at a competitive cost, notably thanks to the tax deductibility of coupons in most jurisdictions. On the investor side, it also made sense in a context of low interest rates in Europe following the debt crisis in peripheral countries.
Two key factors enabled this rapid growth over the last decade. First, S&P updated its methodology regarding hybrid capital in 2012, clarifying how to classify equity content and the treatment of step-up features. Second, following this update, a new generation of corporate hybrids emerged with a design where the loss of the equity content matched the first call date; it quickly became the new standard. This innovation proved to be decisive for larger adoption, as the better-standardized structure made the bonds more transparent and comparable, as well as incentivizing issuers to call their bonds at the first call date.
Executive Summary
Tax treatments and rating agencies’ methodologies were limiting corporate hybrid bonds’ development potential in the US. This is no longer the case after Moody’s methodology changed.
The US corporate hybrid market took note and issuance volume jumped in 2024.
Among the most obvious new issuers are the corporates already issuing preferred shares in the US. We will analyze this market and evaluate the benefits of the corporate hybrids in this context.
New issuers could also tap the market to protect their balance sheets and to fund growing capex needs.
In terms of market conventions, US preferred shares and European corporate hybrids are quite distinct. US corporate hybrids can potentially add an interesting diversification element to the global asset class.
The growing US corporate hybrid market would also have an impact on the asset class’ ESG characteristics, with opportunities and challenges.