Improving macro picture provides boost to bank earnings
The corporate hybrid market has remained buoyant in 2021, with more than USD 20 billion of new supply. This follows a year of record growth in 2020 for corporate hybrids – a market now estimated at close to USD 250 billion across currencies. For issuers, corporate hybrids remain an attractive value proposition as these are de facto ‘cheap equity’. Rating agencies assess hybrids as part equity (typically 50% equity content) up to a certain limit. This means that for issuers, printing new hybrids at a cost of even 4-5%, tax deductible, remains attractive compared to a cost of equity for 7-10%. The acceleration of growth of the market has been driven by several factors:
- Issuers have not used hybrids extensively in the past, although it could make sense for up to two thirds of issuers to optimise or strengthen their balance sheet.
- The hybrid market has become more mature, with a critical size reached and a strong investor base. The standardisation of bond structures (now very similar across issuers) has also been a positive driver – with hybrids now a homogeneous asset class.
- Hybrids are an efficient tool for issuers to strengthen their balance sheets. We have seen a significant number of issuers increase their hybrid base to execute on their rating upgrade strategies (real estate sector), to help finance mergers and acquisitions (M&A), as in some cases shore up their balance sheet during Covid-19 or in a challenging environment (oil & gas majors during the oil slump) to protect ratings.
The rapid increase of supply has led to attractive opportunities for investors, with new deals offering value in a challenging fixed income context.
As a reference point, investment grade-rated hybrids still offer spreads of around 200 bps or an attractive multiple of circa 2.3 times senior investment grade bonds. With spreads of up to 300 bps for select issuers in the market, we continue to see hybrids as an attractive source of yield from high-quality issuers looking to maintain to improve their credit profile (issued for capital purposes).
One example of a recent attractive deal involves Veolia. The French company came back to the hybrids market in order to help finance its buyout of Suez, its main competitor. Hybrids allowed