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8 | October 2010 | ifr special report EUROPEAN INVESTMENT-GRADE CORPORATES Thriving hybrids

The corporate hybrid market is enjoying a mini-revival having reopened last month in Europe amid a great deal of fanfare. The structure offers obvious benefits for issuers and investors alike in the current low interest rate environment. Bankers are braced for one of the busiest periods for corporate hybrid issuance since the onset of the credit crisis in 2007. Andrew Perrin reports.

“The European investor base has evolved. Fears about the health of peripheral sovereigns and increased talk of a re-composition of bank capital have geared more investors towards a broader range of corporate exposure.”

D European corporate hybrid issuance volumes €bn

8 7 6 5 4 3 2 1 0

2004 Source: Barclays Capital 2005 2006 2007 2008 2009

2010 Ytd

espite a macro-economic picture that is far from certain, bond markets throughout the globe have been firing on all cylinders

since bankers returned from their summer vacations. And while September is generally a month of heightened activity – it would have been more noteworthy had the expected business not transpired – the sheer scale of investor appetite has been notable. It has been well known that investors have been cash rich, but their renewed enthusiasm has skewed the

demand/supply dynamic, creating some very interesting trends.

One development is the proliferation of new structures now on offer, of which the re-opened European corporate hybrid market is one. It has once again established itself within the capital structure for European corporates that are looking to

raise funding while preserving their credit ratings. It has traditionally been viewed as a bull-market instrument, given that exposure is deep down in the company’s capital structure. But it is enjoying a resurgence because investors are looking for incremental returns in the persistent low interest rate environment, that is ac- companying the prevailing global uncertainty.

“The European investor base has evolved as their perception of risk has changed in an environment of sluggish economic growth,” said Christopher Marks, global head of DCM at BNP Paribas. “Fears about the health of peripheral sovereigns and increased talk of a re-composition of bank capital have geared more investors towards a broader range of corporate exposure, and the more subordinated the better in this low rate environment.” Things got off to a promising start in February 2010 when Dutch state-owned electricity company TenneT’s €500m perpetual NC7/NC12 transaction, the first corporate hybrid for 18-months, garnered robust demand of about €3bn from an en- thusiastic band of investors. However, despite the positive reception the deal received, it remained the only corporate hybrid until July.

Ratings clarification

This was not due to a lack of interested candidates. Rather, there was a lack of consistency as to how the structure was treated by the rating agencies. It is a scenario that has often plagued the market’s development in the past. However, participants breathed a collective sigh of relief in July when Moody’s revealed that its long-awaited framework for assessing the equity and debt characteristics of hybrid securities was unlikely to trigger significant changes in the credit ratings of companies that issue these securities.

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