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Take note: Finding opportunity in mispriced corporate hybrids

6 May 2022 |
Active ESG
In our latest white paper, Robin Usson, senior credit analyst, asks: Is there scope to extract structural alpha from misunderstood extension risk?

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


Risk profile

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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