Fast reading
- For non-financial corporate hybrids, fundamentals still matter.
- The main driver of sub-senior spread is extension risk, as coupon deferral risk is structurally low and early call risk is often manageable.
- Yet extension risk is often mispriced during market sell-off, creating structural alpha.
- We are buyers of extension risk premium when it exceeds >10% of fair value for lower-beta hybrid and 20% for higher-beta hybrid.
Understanding extension risk in hybrid debt
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