Last August we covered how the necessity to balance the heightened default risk environment and the lack of yields in the safer parts of the fixed income universe will drive investors into the corporate hybrid market. The issuance of this type of instrument has benefits for both the issuer and the investor.
The interest from the issuer side to issue corporate hybrids picked up in 2020 as fundamental conditions deteriorated and companies were looking for ways to raise additional liquidity in a way that manages the damage to the credit rating. For investors it is part of the reach for spread phenomenon, where it makes more sense to take the subordination risk within a corporate that is better positioned for the unprecedented environment, than to reach for additional returns in weaker corporates. As a result, the issuance of the corporates hybrids reached the all-time highs last year of €43 billion (see figure 1).
This trend is likely to continue in 2021 as it will remain key for issuers to optimise the capital structure and respond to the macroeconomic uncertainty, while the issue of lack of yield in the fixed income market is unlikely to go away any time soon.
Moreover, hybrids could be an instrument of choice for corporates looking to fund the pick-up in M&A that is bound to happen as the outlook clears up a little bit.
Figure 1. Issuance of corporate hybrids reached a record high of €43bn
Source: Bloomberg, Federated Hermes, as at January 2021. Past performance is not a guide to future performance.