Corporate hybrid boom comes with pricing risks

Corporate hybrid issuance is on track for a record year in both Europe and the US, driven by expanding supply well beyond the traditional utilities, energy, and telecoms issuers. European volume has reached €28bn year-to-date, up from just €6.5bn at the same point last year, with six of the last seven trading days seeing hybrid supply, a pace that reflects both issuer appetite and the market's capacity to absorb it.

Cyclical names like carmaker Stellantis are using hybrids to defend investment grade ratings, broadening what is typically a little-changing roster of issuers. Spreads have tightened roughly 50bp since the start of 2025, while the premium over senior debt sits in a range of around 8-120bp depending on name quality. Primary market demand meanwhile remains exceptional; power grid operator Ampiron's €1bn deal on Monday drew peak orders above €8bn with what we saw as zero new issue concession. The so-called AI hyperscalers, facing an estimated $650bn of aggregate 2026 capital expenditure (capex), are a logical next entrant in our view.

However, corporate hybrid call dynamics differ sharply across regions, and a broader, more cyclical, one-off issuer base raises potential extension risk in a way that echoes the European real estate expansion of 2020-21.

The breadth of recent issuance illustrates how far the hybrid market has evolved beyond its traditional base. Deals across April 2026 alone span repeat utility issuers, cyclical industrials, and an agri-commodity quasi-sovereign, each with a distinct motive from acquisition financing to outright ratings defence. The table below highlights a selection of recent transactions that together capture the current market dynamic: exceptional demand and tight pricing for high quality credits, alongside a meaningful concession required for issuers bringing weaker fundamentals or less familiar credit profiles to the asset class.

Are markets mispricing new issuer risk?

Spreads and sub-senior differentials for corporate hybrid issuers have generally compressed. The sub-senior spread has narrowed to around 80-120bp in Europe and 90-140bp in the US, with higher quality names at the tighter end of the range. Yet the all-in yield argument remains compelling: yields of 4-5% in euros and 5-6.5% in dollars and sterling mean hybrids continue to offer potentially high yield-like returns for investment grade credit risk.

It is worth drilling into some of the sub-senior dynamics, however, as the range masks some notable outliers. Italian grid operator Terna's record sub-senior spread of under 60bp is perhaps forgivable given its established track record and repeat issuer credentials, but even here we question whether that level adequately compensates for the extension and coupon volatility these instruments can exhibit through the cycle.

More thought-provoking is SQM, one of the world's leading lithium and fertiliser producers, which recently issued two inaugural hybrids (one in dollars and one in Chilean pesos) to support deleveraging and reduce Moody's downgrade risk. While this is a well-known issuer in Latin America with a solid BBB+ senior rating, as an emerging markets (EM) name and first-time issuer, one would expect a meaningful premium to reflect the novelty, earnings cyclicality, and EM risk. Instead, SQM’s January deal priced at a sub-senior spread of approximately 110bp, broadly in line with investment grade (IG), high quality, non-cyclical, repeat issuers in the space with a history of calling hybrid bonds. There is likely some scarcity value given the limited supply of EM hybrids, but it does raise the question: is the market demanding enough premium for issuers using the instrument purely for ratings defence, with volatile earnings and no reputational consequence for extending, particularly in the 30-year non-call 5 dollar format? In our view, the answer is no. The compensation on offer does not adequately reflect the subordination risk, call optionality, and the absence of the issuer loyalty that underpins the European market's track record.

“Reverse Yankee” supply (US companies issuing in foreign currencies such as euros or sterling) adds another dimension. Reverse Yankee hybrid issuance is on track for a record year as US issuers increasingly access the tighter pricing available in the more mature European market. General Mills, for example, despite cyclical fundamentals and inaugural issuer status, achieved a sub-senior spread broadly comparable to Southern Company, a higher quality, more stable utility issuing in dollars. There is a risk that scarcity value and diversification appeal are driving European investors toward these names without due consideration for the more challenging underlying fundamentals.

Are hyperscalers the next wave?

Hyperscalers may well be the next frontier in the corporate hybrid market. According to Bank of America, the five largest US hyperscalers, Microsoft, Amazon, Alphabet, Meta and Oracle, are expected to spend approximately 90% of their operating cash flow on capex in 2026, up from 65% in 2025, driving a surge in IG bond issuance. Leverage is starting to build, and special purpose vehicles (SPVs) are already being used to keep project-level data centre debt off parent company balance sheets. Oracle stands out to us as the most stretched relative to peers from a leverage and cashflow perspective. Hybrids are a logical next tool: 50% equity credit, senior ratings protection, and an efficient way to raise quasi-equity capital.

Given the broadening issuer base, it is worth highlighting the difference in call dynamics between the US and European markets. Under the revised methodology of ratings agency Moody's, US hybrids now receive 50% equity credit, up from 25%, bringing them closer to European treatment, but call mechanics still diverge. In Europe, missing a first call typically means immediate loss of equity credit; non-calls are rare and are read as distress, carrying meaningful reputational cost. In the US, 30-year non-call 10s work similarly as equity credit falls away at year 10 if the deal not called, but 30-year non-call 5 structures retain their equity credit through the first call as it only disappears at the 10-year mark. The practical implication is that US issuers are likely to evaluate calls purely on economics: if the reset spread is below prevailing market levels, skipping the call would be rational and expected given the absence of reputational cost. For a new, less tested cohort of issuers entering the market primarily for ratings defence, we think the differing incentives in the US and Europe must be reflected in the price.

European real estate redux?

The expansion of the corporate hybrid market is broadly welcome. The instrument is well understood, demand is deep, and for the right issuer it remains one of the most efficient tools in the capital structure. The risk is not the instrument itself, but the speed and direction of the broadening.

The European market has earned its tight pricing. Large repeat issuers have consistently called at first call dates, and the asset class navigated the Covid-19 pandemic without systemic disruption, a track record that in our view justifies the current level of call risk compensation. The US market has not yet been through that test. The Moody's methodology upgrade brings it structurally closer to Europe, but the issuer base is newer and call conventions are less established.

History offers a useful reference point. European real estate firms entered the hybrid market aggressively in 2020–21, drawn by cheap financing and the rating agency equity credit. Investors absorbed the supply, compressed spreads, and largely ignored the sector's sensitivity to rates. When the cycle turned, it wasn't individual credit failures that caused the damage but the realisation that extension risk had been systematically underpriced across an entire cohort of issuers simultaneously, alongside a fundamental reassessment of their ability to refinance through the cycle. The lesson wasn't about any single name; it was about what happens when a new, less tested segment of the issuer base grows too quickly relative to the market's ability to price the risk accurately. Today's dynamic of record issuance, a widening issuer base, and spreads at historical tights rhymes closely enough to warrant attention rather than panic.

Attractive risk-reward

We remain very comfortable with high quality, non-cyclical, repeat hybrid issuers where the carry is attractive and the call framework is well established. We are more cautious on one-off names with volatile earnings profiles, where diversification appeal and scarcity value risk suppressing pricing to a point that does not adequately reflect subordination risk, call optionality, or the issuer’s limited long-term commitment to the instrument. The broadening of the market is welcome, but only if it is priced accordingly.

US hybrids still screen cheap to us relative to Europe, and we think name selection matters more than it did 12 months ago. To be clear, we like the risk-reward profile of corporate hybrids – yields look attractive, carry is key, but name selection will be vital as the market broadens beyond its traditional issuer base.