- Non-financial corporate hybrids1 had a difficult 2022, with high interest rate volatility contributing to underperformance of the asset class.
- Recently, negative investor sentiment around subordinated financial bonds following the Credit Suisse collapse has further weakened technicals on the corporate side, leaving valuations trading at attractive levels compared to history (see chart below).
- When considering hybrid valuations versus European investment grade, high quality European high yield and European equity, hybrids are trading around two standard deviations cheap relative to their relationship over the last 10 years.
- Average yield on the Credit Suisse European Corporate Hybrid Index was 7.99% as at 19th May 2023, compared to an average earnings yield of 7.28% on the Stoxx 600 Equity Index. Similarly, credit spreads on the hybrid index were 544bps, versus 358bps for BB-rated European HY issuers and 149bps for European non-financial investment grade issuers.2
- Given the subordinated nature of the asset class, credit selection is vital. However, with valuations where they are, we believe corporate hybrids currently offer an attractive return proposition for credit investors.
Z-score odyssey: 10 years of European corporate hybrid relative values
1 Subordinated bonds issued by investment grade companies that contain characteristics of both debt and equity.
2 Source: Bloomberg as at 19 May 2023.