Hybrid bonds, securities blending debt and equity characteristics, are gaining traction in the U.S. market, with issuance hitting a record $35.6 billion this year. A pivotal shift by Moody’s Ratings in February simplified the criteria for treating hybrid bonds as equity, spurring companies like CVS Health (CVS). to explore this financing avenue. In early December, CVS issued its first hybrid bond, raising $3 billion as part of a strategy to manage its debt load and maintain its investment-grade ratings.
The surge in hybrid bond issuance reflects robust demand among investors attracted to their higher yields and subordination in high-grade capital structures. Utilities have been prominent issuers, raising funds to support AI-driven data center infrastructure, while companies in communications and consumer discretionary sectors are expected to increase participation. Analysts at Barclays (BCS) project hybrid bond sales to grow another 7% in 2025, driven by tight spreads and the securities’ inclusion in major bond indices.
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Market Overview
- Hybrid bond issuance reached $35.6 billion in 2024, driven by demand for equity-like debt instruments.
- Moody’s (MCO) revised methodology for hybrids has bolstered issuance across utilities and industrials.
- CVS Health issued its first hybrid bond, raising $3 billion to manage debt and maintain credit ratings.
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Key Points
- Hybrids appeal to investors with higher yields and deductibility of regular payments for issuers.
- Utilities use hybrids to fund capital-intensive projects, particularly in AI-related infrastructure.
- CVS's hybrid issuance received $17 billion in orders, signaling strong market appetite.
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Looking Ahead
- Barclays predicts hybrid issuance will grow 7% in 2025, setting another record.
- Consumer discretionary and communications sectors may emerge as key issuers.
- Tight spreads and broader investor access through bond indices will sustain hybrid demand.
The rise of hybrid bonds underscores their versatility in addressing corporate financing needs while preserving credit ratings. As utilities and other capital-intensive sectors embrace this innovative instrument, the market is poised for sustained growth.
CVS Health’s successful debut highlights the potential for hybrids to attract investor interest and manage leverage. With Moody’s revised policies and tight credit spreads, hybrid bonds are likely to remain a critical financing tool in 2025.