In the event of bankruptcy, the bond investors would therefore only be compensated after the other creditors. In contrast to senior debt securities, hybrids receive a rating that is approximately two levels lower due to their subordination. Conversely, yields on hybrids are higher than those of senior debt securities.
Typical structure of a corporate hybrid bond
Corporate hybrids have a very long or infinite remaining term (perpetual), but usually have an initial call date after 5 to 10 years. The coupon is fixed until the first call date, after which the basic interest rate and credit risk premium may be redefined.
According to market convention, corporate hybrids are priced at the earliest possible call date. This is because the issuers have a very great incentive to repay the bonds on the first call date: If an issuer does not repay the hybrid on the first call date, the bond loses its eligibility to be considered as share capital with the rating agency S&P, for example. From the issuer's point of view, the hybrid then becomes a very expensive senior bond.
Corporate hybrids are not bail-in instruments like CoCo bonds and are therefore not subject to any conversion, whether automatic or effected by the regulator.
Strong growth and stability even during crisis
The corporate hybrids market has grown strongly in recent years and has evolved into a mature investment segment where diversified investing is possible. Over the last ten years, the market for corporate hybrids has grown sixfold. The current size corresponds to approximately USD 188 billion in outstanding bonds, which is two thirds of the size of the CoCo market. Investors can currently select from 180 bonds from 81 well-known issuers.