There has been a resurgence of political risks in Europe.
In Spain, prime minister Mariano Rajoy is under investigation. In Italy, Silvio Berlusconi’s coalition is riding high in opinion polls.
Little wonder that credit markets have, in recent weeks, unwound their positive start to 2013. Trying to find good investment ideas in this environment is difficult – but not impossible.
Recently, we have been adding to positions in hybrid instruments from non-financial corporates. As issuers seek to lock in unprecedentedly low yields, we’ve seen a big upsurge in corporate hybrids.
EDF, the French utility, recently borrowed roughly €4bn (£3.5bn) in the biggest ever hybrid bond issuance. Hybrids are attractive for issuers as rating agencies may count hybrid debt as part equity. This can help support a company’s credit rating. Also, the cost of the fund raising is typically lower than equity financing.
For the investor, it’s all about yield. Hybrids rank lower in the capital structure than plain bonds, so investors theoretically have a higher risk of losing money in the event of default. But the compensation comes in the form of a higher return – particularly attractive in the current low yield environment.
Many of the most attractive hybrids are issued by quality names such as Siemens, RWE, Thames Water and Scottish & Southern Energy. And, of course, EDF – which at time of writing was yielding 5.8 per cent.
Luke Hickmore is co-manager of the Swip Strategic Bond fund
