Heavy supply of corporate hybrids spells opportunity for yield hunters
Utility and energy companies have tapped strong demand for hybrid bonds to protect their ratings.
In mid-April, Danish renewables company European Energy tapped its outstanding €75 million hybrid bond, first launched last September, for another €75 million issue priced to yield 5.3%.
That drew healthy demand from Nordic investors attracted by the high income from a green instrument.
Corporate hybrid bonds are deeply subordinated, typically with deferrable coupons and no set maturity, instead incorporating call dates. They stand just above equity in the capital structure and are usually treated as 50% equity by ratings agencies.
Hybrids are often rated two notches below borrowers’ senior debt. Issuers are incentivized to call because failure to do so loses equity credit.
Most issuers are investment grade and the yield from good credits attracts buyers, especially in Europe where negative nominal rates are now well established in government bonds and even corporate debt.
The European Energy deal comes after a busy 12 months for corporate hybrids. The primary market almost doubled in size last year to €50 billion, thanks mainly to utility and energy companies issuing into the rally in the second half of 2020.