“We now expect full-year hybrid volumes to match or exceed the EUR 30bn issued in 2019,” says Chammem. Several issuers are likely to seek early refinancing of callable hybrids, while others are set to tap the market as the ECB’s loose monetary policy and bond-buying programmes underpin investor demand for hybrid securities – assuming no further market shocks such as a second Covid-19 wave in Europe.
For the hybrid segment, the ECB’s rapid response to the coronavirus crisis was crucial for restoring confidence, says Chammem. Following the rapid rise in spreads after the initial Covid-19 shock, the central bank’s enlarged bond-buying programme brought doubt down investment grade spreads by 200 basis points and encouraged issuers and investors to return to Europe’s capital markets in general.
“For some investors, hybrid bonds present an increasingly attractive combination of risk and return - particularly those issued by investment-grade names,” says Chammem. “The rapid recovery in the hybrid segment after shows how eager companies are to take advantage of the equity-like features of the instruments and the ability to defer coupons,” she says.
The slump in economic activity caused by the lockdowns and other physical distancing measures in response to Covid-19 has inevitably strained the finances of companies in many sectors, enhancing the appeal of issuing hybrid securities which credit rating agencies typically assign a 50% equity weighting.
BP’s Q2 entry into the market was dramatic. The British company’s deal is the largest in the history of Europe’s hybrid market with a total value of EUR 10.6bn in five tranches, three currencies, with first call dates in five to 10 years.
German auto maker Volkswagen AG re-entered the hybrid bond market for the first time since June 2018 with a EUR 1.8bn dual-tranche hybrid deal to refinance a EUR 1.25bn hybrid bond with a first call date in March 2021 and to bolster corporate creditworthiness.
Most issuers continue to use hybrid proceeds to refinance upcoming calls on existing bonds and replace earlier, more expensive issues. Investment grade corporates still dominate the market.
Capital-intensive sectors like utilities, real estate and telecom continue to be among the leading issuers, such as power company Energias de Portugal. Among Europe’s regions, Nordic issuers are increasingly active such as Akelius Residential Property AB and Telia AB.
ESG-related financing through the hybrid segment continues to be noteworthy, growing beyond utilities and government-linked companies to include telecom operators such as Telia and Telefonica SA.
Scope says the market’s H2 pipeline looks good, estimating that there are outstanding hybrids worth EUR 4bn with a call date in 2020 in addition to more than EUR 12bn with call dates in 2021 that could be refinanced early. Utilities SSE PLC and TenneT Holding BV have raised EUR 1.1bn and EUR 1bn respectively this month.