US corporate hybrids gain momentum after ratings shift

Across the Atlantic, the US corporate hybrid market has not developed to the same extent. Historically, hybrids in the US were granted only 25% equity credit by rating agencies, insufficient to justify issuance over the alternative, preferred shares, which offered 50% equity treatment.

However, in February 2024 Moody’s revised its methodology for US hybrids, doubling the equity credit from 25% to 50%, aligning with European standards and bringing the balance sheet benefits in line with that of US preferred shares. On top of that, hybrids carry a key advantage: their interest payments are tax-deductible, unlike the dividends on preferred shares, which are paid post-tax. This shift makes hybrids not only comparable in balance sheet terms, but also more attractive from an economic perspective.

This change from Moody’s prompted a surge in issuance, supported by tight credit spreads, strong technical demand, and favourable market conditions. Issuance in 2024 totaled $35bn, a fivefold increase year-over-year and surpassing euro-denominated supply (€29bn) for the first time since 2017. This trend has continued into 2025 and is likely to persist, driven by the greater depth of the US market and the growing appetite from US issuers to build out their hybrid capital stack and refinance outstanding preferred shares. So far, US issuance has been dominated by the energy and utilities sectors, but we expect the market to broaden as other industries, particularly telecoms, begin to adopt the structure, aligning it more closely with the diversified sector mix seen in Europe.

Key differences between US and European hybrids

A key structural feature of hybrids is the call option, and there are notable differences in how these are treated between Europe and the US. In Europe, issuers are strongly incentivised to call at the first call date, as failure to do so results in the loss of equity credit – forfeiting the primary benefit of hybrid issuance. In the US, rating agencies prefer structures with a 30-year final maturity (the norm in Europe is very long dated or perpetual instruments, though this is gradually shifting). For example, for 30-year non-call 10 (30NC10) bonds, equity credit is lost if not called at year 10. However, for 30-year non-call five (30NC5) structures, equity credit is retained after the first call and only removed if not called at the second call date, effectively after 10 years. S&P follows a broadly similar approach, removing equity credit 20 years before final maturity.

As the US hybrid market matures and becomes more comparable to Europe, one key difference investors must consider is the call landscape. Broadly speaking, the US market is more tolerant of non-calls when they make economic sense. This is already well established in the US financials preferred shares market, where issuers frequently skip calls if reset rates are below market levels, and this is not viewed as a sign of stress but rather a purely economic decision. In contrast, non-calls remain uncommon in Europe and can sometimes be perceived more negatively, particularly in the Additional Tier 1 (AT1) and corporate hybrid markets, reflecting different market practice and investor expectations.

Given US hybrids with a five-year call retain equity credit beyond the first call, investors should evaluate these instruments primarily through an economic lens. If the reset spread is lower than prevailing market levels, a non-call is possible, and in the US context, this would generally be expected and not viewed as a sign of weakness. Based on the US market’s treatment of non-calls in financials, we expect a similar dynamic to take hold in corporate hybrids.

Valuations vs. European peers

As US hybrid issuance surged in early 2024, the new structure offered some spread premium over European peers, reflecting their relative novelty in the market.
For example, in February 2025, NextEra priced a BBB rated 30NC5 hybrid at a spread of 205bp over Treasuries. At the time, hybrids with a similar call date from European energy firms Iberdrola and Engie, both rated BBB-, were trading at around 170bp over Bunds – a 35bp pick-up for the US deal over its respective risk-free asset despite the similar rating and comparable structure.

Today, Iberdrola and Engie both trade at around 145bp, while NextEra trades at 170bp. If priced to its second call date, when it loses equity credit, the spread on NextEra tightens to 155bp, narrowing the differential. But nevertheless, this highlights the opportunity US hybrids can offer.

NextEra is just one example. While some US hybrid names now trade more in line with European peers, others still offer a notable pick-up. For instance, Canadian telecom hybrids issued in USD are currently trading with a spread premium of around 45bp relative to similar European issuers, presenting more compelling relative value.

Overall, on a ratings-adjusted basis, US hybrids look to offer some attractive relative value opportunities versus their European peers. As highlighted, idiosyncratic factors are important to consider, particularly the heightened call risk associated with non-call five US hybrids, which should warrant additional spread compensation relative to European structures based on their reset level. As more US issuers are drawn to hybrid issuance, we expect further compelling opportunities to emerge.

US hybrids poised for larger role in portfolios

The growth of the US hybrid market is a positive development for global fixed income investors, offering greater diversification and new opportunities as more issuers use hybrids to optimise capital structures.

While US hybrids share characteristics with their European counterparts, the key structural differences, particularly in call dynamics and rating treatment, necessitate a deep understanding of their mechanics and in our view make the asset class more suited to active management.

For issuers, hybrids offer cost-effective, equity-like capital with limited impact on credit metrics. For investors, they can offer high yield-like returns for investment grade credit risk, with the potential for attractive risk-adjusted returns through the cycle. With strong structural support and the depth of US capital markets, we believe US hybrids are poised for continued growth and a larger role in global credit portfolios.