What are corporate hybrids and how do they work?

Corporate hybrids are bonds issued by companies that combine characteristics of both debt and equity.

Hybrids resemble ordinary corporate bonds because they pay regular coupons and can be called by the issuer, giving them an expected maturity date, but they resemble equity in that they have either no set maturity date or a very long one, and issuers can pause coupon payments in the same way they can with equity dividends.

For issuers, corporate hybrids are useful because favourable treatment from rating agencies enables companies to issue more debt without negatively impacting their overall credit rating.

For investors, corporate hybrids can be attractive assets as they are typically issued by robust investment grade companies, but pay much higher yields than regular corporate bonds.