FIVY - Corporate Hybrids Take The World Stage - Revisited

2025-01-24 05:35:00 ET

Summary

• European investors were receptive to the newly issued hybrids, as the market quickly standardized to a structure that enforced the loss of equity content at the security’s first call date.
• European issuers initially struggled to adapt to the higher cost of funding after a decade of zero to negative interest rates.
• At the more speculative end of our outlook, we think the European hybrid market could see an innovative structure with 100% equity content.

By Linus Claesson, CFA & Robin Usson

In May 2024, we published a white paper on the globalization potential of corporate hybrid securities, highlighting how recent changes to Moody's rating methodology had significantly enhanced their appeal to U.S. corporate treasurers. We anticipated a convergence with European standards in the U.S. market and predicted the emergence of a two-tier structure: long-dated instruments with coupon step-ups, the structure already common in Europe, and the increasingly popular 30-year structures without step-ups, which are akin to European hybrids with 10-year first call dates.

A year later, we observe that the momentum for U.S. hybrids issuance has not only persisted, but even exceeded our expectations, with a total of $27bn issued in 2024. This growth included expected switches from preferreds to hybrids (e.g., by Dominion Energy) and expected capital expenditure funding (by most U.S. utilities), but also unexpected issuances to protect under pressure credit ratings (e.g., by Aptiv and CVS Health). Among other forecasts for 2025, we anticipate more new issuers to enter the market, leading corporate hybrids, long dominated by European companies, to become more evenly split between Europe and the U.S....

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