Corporate Hybrids
Debt instruments issued by corporations (CRP) that combine characteristics of equity and conventional bonds, sitting midway between the two in a company's capital structure.Â
Like bonds, corporate hybrids can pay fixed or floating interest rates, but are structured to subordinated and often perpetual or long-dated and often include issuer call options—features that give them equity-like qualities. The issuer may defer coupon payments without triggering default, adding flexibility similar to equity dividends.
From a corporate finance perspective, hybrids allow companies to strengthen their balance sheets and preserve credit ratings without diluting existing shareholders. Rating agencies often classify a portion (typically 50%) of hybrid capital as equity when assessing leverage ratios, while investors generally regard them as high-yielding fixed income instruments, compensating for their higher subordination and extension risks.
The hybrid market is most active among investment-grade issuers, especially in utilities, telecoms, and industrials, where companies seek to finance large capital expenditures or mergers while maintaining financial flexibility. However, hybrids also carry unique risks, such as call uncertainty, coupon deferral, and sensitivity to changes in credit spreads and interest rates.
