Uriel Saragusti, Head of Credit Division, LFDE.
Driven by rapid internationalisation and robust issuance volumes, the corporate hybrid debt market is moving up to a new level. Its momentum continues unabated. Changes in rating agency criteria have encouraged the entry of new global issuers, positioning the segment as a vital link for the financing of the major transformations currently underway. Backed by sectors offering strong visibility, we believe this market represents a strategic diversification pillar, offering an attractive risk-return profile.
The corporate hybrid bond market now surpasses €350 billion in outstanding assets. [1] Predominantly European, with France and Germany leading the way, this universe is built around generally listed issuers with proven financial strength. Although most issuers are Investment Grade [2] at senior level, the inherent subordination of these securities can sometimes result in a High Yield rating for the instrument itself, reflecting the risks associated with this type of debt, while offering an attractive additional yield in return.
A key asset class on a global scale
With nearly €85 billion in new issuance, 2025 was the busiest year of the past decade,[1] confirming its transformation into a key asset class on a global scale. 2026 could see a new record, with issuance already exceeding €51 billion.
This enthusiasm is due in particular to changes in rating agency methodologies – notably Moody’s – regarding the treatment of hybrid instruments. This change grants a 50% equity credit to dated subordinated bonds,[3] compared with 25% previously in most cases. They are now therefore on a level similar to that of preferred shares in the United States.
Another decisive factor is the sharp increase in financing needs linked to the technological and environmental transformations currently underway. Many companies are embarking on major investment cycles, particularly utilities, which are key players in the electrification of uses and in meeting the additional needs arising from the deployment of artificial intelligence. These substantial financing needs highlight the value of hybrid bonds: this asset class enables companies to secure financing while limiting the deterioration of the leverage ratios assessed by rating agencies.
Financial flexibility and balance sheet protection
Characterised by very long maturities, or even perpetual status, hybrid bonds also include issuer call options, dates on which the coupon is reset, thereby helping to limit interest rate risk. Furthermore, in the event of default, repayment ranks behind that of all other bond tranches. In return for the flexibility offered to issuers, hybrid bondholders benefit from higher yields than those available on senior bonds. We therefore believe that investing in this type of instrument requires specific expertise to assess the inherent risks and identify the opportunities they offer, while optimising the risk-return profile.
Launched in 2017, Echiquier Hybrid Bonds, one of the first strategies dedicated to this asset class, is part of this dynamic. Through a conviction-based, benchmark-agnostic approach focused on a universe of euro-denominated subordinated bonds issued by non-financial corporates, the fund targets predominantly Investment Grade issuers. Free from any benchmark constraints, this fundamental strategy focuses on balance sheet strength while capturing the additional yield offered by subordinated tranches, without any rating restrictions at security level.
[1] As at 31 May 2026, all currencies combined. Source: Bloomberg
[2] Securities with credit ratings ranging from AAA to BBB- according to Standard & Poor’s
[3] A bond that, in the event of issuer default, is repaid after senior creditors.
