The U.S. corporate hybrid market emerged as a competitor to Europe’s in 2024, creating alpha opportunities for global investors like Neuberger Berman.

In May 2024, we published a white paper on the globalization potential of corporate hybrid securities, highlighting how recent changes to Moody’s rating methodology had significantly enhanced their appeal to U.S. corporate treasurers. We anticipated a convergence with European standards in the U.S. market and predicted the emergence of a two-tier structure: long-dated instruments with coupon step-ups, the structure already common in Europe; and the increasingly popular 30-year structures without step-ups, which are akin to European hybrids with 10-year first call dates.

A year later, we observe that the momentum for U.S. hybrids issuance has not only persisted, but even exceeded our expectations, with a total of $27bn issued in 2024. This growth included expected switches from preferreds to hybrids (e.g., by Dominion Energy) and expected capital expenditure funding (by most U.S. utilities), but also unexpected issuances to protect under pressure credit ratings (e.g., by Aptiv and CVS Health). Among other forecasts for 2025, we anticipate more new issuers to enter the market, leading corporate hybrids, long dominated by European companies, to become more evenly split between Europe and the U.S.

Executive Summary

  • The corporate hybrid market, once Euro-centric, is witnessing a transatlantic shift as U.S. issuers increasingly participate following last year’s changes to Moody’s rating methodology.
  • The combination of tax-shield advantages and ratings benefits with the 50% equity content creates favorable conditions for U.S. corporate adoption of hybrids, in our view.
  • Standardization around the 30-year non-call (30NC) structure without coupon step-ups, alongside hybrids’ diversification benefits and higher carry and yield for less credit risk, is boosting demand and appealing to a broad range of investors.
  • In particular, we see growing demand for U.S. 30NC10 structures that align the loss of equity content under Standard & Poor’s rating methodology with the first call date, akin to the European structure with coupon step-ups.
  • This alignment between issuers and investors has created a potential “sweet spot” in the U.S. hybrid market that is distinct from European-style hybrids with coupon step-ups.
  • Key themes in our outlook for 2025 include: more issuance (from both the U.S. and Europe, from European companies issuing in the U.S. and vice versa, from new sectors and, especially, to finance rising M&A activity); more demand (from U.S. investors in particular, but also from European investors); further consolidation of the U.S. market in the 30NC10 structure; and more structure innovation.

No Longer a “European” Asset Class

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Source: Bloomberg, Neuberger Berman.