Despite declining in size since 2021, and skeptics calling for its demise amid rising interest rates, the European-standardized corporate hybrids market has experienced a resurgence since the second half of 2023. Notably, new issuers have entered the market for the first time, including Spain’s Redeia, Australia’s APA Infrastructure and Vår Energy from Norway.
Moreover, we continue to see growth in the U.S. hybrid market, and we think we may be on the verge of a period of concerted globalization for the asset class. We have already seen some evidence of convergence on European standards in U.S. hybrid issuance, heightening their attractiveness to global investors, and we think recent changes to rating methodology by Moody’s significantly enhances their appeal to U.S. Corporate Treasurers.
We regard these as pivotal developments for the global corporate hybrids market. Similar evolution in other less-mature asset classes has often provided opportunity for global players. At Neuberger Berman, we believe our comprehensive global research capabilities equip us to capitalize on this opportunity.
Executive Summary
- We believe European issuers have dominated the global market in corporate hybrid securities because European structures have standardized on an optimal “sweet spot” between the needs of investors and issuers while the U.S. hybrid market has remained fragmented.
- In our view, one reason for this fragmentation has been the way Moody’s rating methodology treated U.S. hybrids: a change to this methodology makes hybrids significantly more attractive to U.S. Corporate Treasurers, and we expect this to trigger growth in the U.S. market.
- We already see early signs of convergence with European standards in the U.S. market, and anticipate more—possibly in the form of a two-tier split between long-dated instruments with coupon step-ups (the most common European structure) and the increasingly popular 30-year structures with no step-ups (effectively the same as European hybrids with 10-year first call dates).
- This convergence marks a shift toward more investor-friendly structures, and reinforces the importance of hybrid structure and loss of equity content in the risk-profile of hybrids; this does not appear to be well understood in the immature U.S. market, and in the immediate term that creates relative-value as well as diversification opportunity for experienced hybrid investors.
- Over the longer term, as global standardization advances and the complexity of the U.S. market declines, we believe Neuberger Berman’s strong global research capabilities and ability to invest in corporate hybrids globally make us uniquely positioned to take advantage of the resulting opportunities.
SIZING THE CORPORATE HYBRID ASSET CLASS: A “EUROPEAN” ASSET CLASS
Total amount outstanding, EUR or USD equivalent
Source: Bloomberg.
