Corporations in Europe are offering investors a different way to counter the low interest rate environment and are also doing themselves a favor.
A new type of bond—called a hybrid—combines the interest payments of a bond without a maturity date, making it perform like a stock.
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Hybrid issuers strengthen their credit ratings because they strengthen company balance sheets without diluting the stock.
Investors get a higher return for higher risk than senior debt from the same issuer. This two-sided benefit to both issuer and investor has caused a boom in hybrid issuance in just the last few weeks.
So far this year, $12.34 billion has been raised globally by companies. That’s a record for January.
The European hybrid market is still small and most issuers are highly regulated and issuers like utilities and telecommunications companies have more reliable cash flow. Bank issuance of hybrids is more established.
Issuers have to pay more than to investors than on their senior debt but current yields are less than the long-term cost of debt. So it helps their balance sheets and is a relatively cheap form of funding.
Both of these attributes would be particularly attractive for banks in distressed countries.
Investors have been trying to find better returns and with the modicum of stability, hybrids have been attractive.
Hybrids also give companies greater flexibility in deciding when to pay them off. They are also more volatile on the downside so market environment is important.
Such investments might appeal to clients looking for higher risk investment options that offer higher returns.
They are also a different form of international exposure
that could be attractive as European financial markets continue to strengthen.