European corporate hybrids: Barclays remains constructive on European corporate hybrids but advocates selective, defensive carry and relative-value positioning.

Overview

This is a European corporate-hybrids strategy report. Barclays argues that the asset class remains an attractive compromise between high-yield-like returns and investment-grade issuer fundamentals, but says compressed spreads require careful issuer- and instrument-level selection rather than broad exposure.

Core views

Barclays expects European corporate hybrids to perform steadily through year-end. The central support is carry: the asset class has an average yield to call of about 5.31%, while many issuers retain robust investment-grade fundamentals. Year-to-date issuance has already exceeded €49bn, with 36% from first-time issuers; roughly half of new issues have underperformed since launch, yet the market absorbed the supply well. Excluding real estate, corporate hybrids broadly tracked the wider credit market year to date and generated solid excess returns. The senior-subordinate spread differential was 118bp, compared with a 108bp YTD average, 109bp LTM average and 92-131bp LTM range. The report argues that corporate hybrids compare favourably with other hybrid-capital segments. They offer higher spread and beta, and better expected returns relative to downside risk than AT1s in an unchanged market, look attractive versus bank Tier 2, and offer a compelling risk/reward pickup over BB-rated senior debt. Although hybrids screen tight on an absolute five-year basis, Barclays considers the senior-sub differential attractive in ratio terms and says corporate hybrids screen wide versus euro investment-grade corporates on a beta-adjusted basis. Its constructive year-end view on investment-grade credit underpins the expectation that decompression risk remains limited. Barclays nonetheless calls for defensive selection because yield-focused demand can enable weaker issuers, sectors seeking rating preservation, or weaker non-S&P-rated structures to issue at insufficient compensation. The two pillars of selection are whether an issuer can remain perceived and priced as a solid investment-grade senior credit, and whether management is committed to hybrids as a strategic layer of the capital structure. The report sees market discipline improving, with capital structures increasingly reflecting issuer-specific risk and special situations. The recommended top-down allocation is to favour carry trades at the front end, particularly the one-to-three-year and selectively three-to-five-year segments, with positions generally up to four years from first call. Barclays is increasingly cautious in the five-to-ten-year area because of rate volatility, preferring issuers with supportive fundamentals and primary-market momentum. It prefers high-reset over low-reset structures because compression between the two has reduced the compensation for extension risk; however, it would become opportunistic on low-reset bonds from strong investment-grade issuers if market weakness causes excessive underperformance. Green hybrids are preferred to non-green equivalents because no greenium is currently priced despite their historical resilience during stressed markets. Utilities and telecoms, which comprise about 70% of the asset class, are preferred sectors because their hybrids offer defensive risk/reward, especially against BB senior debt that can trade equally tight or tighter despite weaker credit quality. Structural factors support Barclays' view that the approximately 100bp senior-sub differential may be durable. Demand is broad and sophisticated across insurers and benchmark real-money investors. While full-year supply may exceed €50bn and the asset class may surpass €235bn, Barclays believes supply is manageable because issuers have proactively managed liabilities; 2027-29 first-call dates remain heavy at roughly €25-30bn annually, but most upcoming calls outside special situations have already been addressed. Around 60% of year-to-date supply has come from high-quality, non-cyclical utilities, energy and telecom issuers. More defensive structures, including 30NC5 and 30NC10 hybrids with 50% equity treatment across rating agencies and certain five-year mandatory settlement features for deferred coupons, may improve technical demand. Barclays therefore expects the senior-sub differential to stay below 130bp in the near term. On extension risk, Barclays concludes that it remains structurally low for solid investment-grade issuers that are priced as such in senior debt. The report says that stress in 2022-23 tested extension, deferral and subordination risks, but that investor-friendly calls and refinancings were the norm outside real estate and idiosyncratic special situations. Strong investment-grade issuers have incentives to call and replace hybrids to preserve ratings, market access and reputation; issuers that are sub-investment-grade or whose senior spreads imply such a downgrade have weaker incentives and may struggle to refinance. Accordingly, Barclays expects call-and-replace to remain the normal outcome, while treating real estate and special situations as exceptions. The report develops a large set of issuer and bond-level relative-value ideas. In utilities and energy it highlights carry in BP, TotalEnergies, SSE, Veolia, Enel, EnBW, Orsted, Harbour Energy and TenneT-related bonds. It favours EDF structures with stronger reset protection amid French political volatility; switching from Engie to SSE because Engie's French gas operations could face political scrutiny; and Enel over Orsted or EnBW where S&P-rating status and outlook improve extension-risk or technical profiles. It also sees TenneT Holding's run-off capital structure as a special situation because only about €1.1bn of HoldCo debt remains and no further HoldCo issuance is expected through 2030. In telecoms, Barclays favours selected Telefonica, BT and Orange carry bonds, and relative-value switches from Swisscom into Orange and from Vodafone into Verizon. It views Verizon's fully investment-grade hybrid rating and deleveraging after the Frontier transaction as superior to Vodafone's lower hybrid ratings and execution risks. It is underweight Telefonica overall because of valuation and M&A concerns, but recommends higher-reset hybrid structures given anticipated refinancing of 2027 calls and associated long-end supply risk. In autos and infrastructure, Barclays remains constructive on Volkswagen hybrids despite weaker 2026 profitability guidance, because cash generation, liquidity and the Future Plan 2030 support credit resilience. It highlights Volkswagen's €7.50% 28-Perp for about 192bp z-spread, 5.34% carry and a 429bp reset spread, and prefers a switch into the €7.875% 32-Perp for stronger reset protection. It also sees attractive curve-wide hybrid risk/reward in Abertis, supported by tariff-linked cash flows, investment-grade ratings and €7.7bn of liquidity as of June 2026. For consumer, tobacco and food issuers, the report identifies value in Bayer's longer-dated €7% 31-83 hybrid after litigation-risk reduction and new issuance, General Mills' €5.25% 34-56 hybrid after recent underperformance, selected Carlsberg curve extensions, and Japan Tobacco and British American Tobacco relative-value trades. It remains cautious on Accor amid Middle East conflict-related travel-demand and inflation risk. For Sudzucker, Barclays recommends pairing a long position in the €5.95% 30-Perp with long five-year CDS: the structure seeks hybrid carry while protecting against a credit event and potentially benefiting from mean reversion. Real estate is the principal defensive exception. Barclays remains bearish on Heimstaden Bostad because two hybrids totaling €1.1bn reset within eight months and refinancing needs could pressure the long end. It is also cautious on Grand City and Aroundtown hybrids because of interest-rate sensitivity, potential new supply, concentrated 2031 calls and past missed-call history. It recommends selling specified HEIBOS, GYCGR and ARNDTN hybrids.

Analysis framework

Barclays starts with the asset class's issuance, spread, yield and relative-performance data, then compares corporate hybrids with senior credit and other hybrid instruments on a beta-adjusted and spread-to-call basis. It combines this top-down assessment with issuer and bond-level relative-value analysis, focusing on curve position, reset spread, call incentives, rating treatment, refinancing risk and capital-structure technicals.

Methodology notes

• Fixed Income and CreditSpread analysis

  Senior-subordinate spread, z-spread-to-call and relative-value analysis

  The report compares hybrid spreads with matched senior bonds, peer instruments and historical ranges to identify relative value and potential compression or decompression.

• Fixed Income and CreditYield curve analysis

  Curve positioning and carry/roll-down analysis

  Barclays distinguishes front-end, intermediate and long-end hybrids by time to first call, carry, reset protection and interest-rate sensitivity.

• Industry AnalysisVolume-price decomposition

  Issuance supply and market absorption assessment

  The analysis relates record issuance volumes, first-time issuance, investor demand and secondary-market performance to assess whether supply can be absorbed.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European corporate hybrids

  Preferred source of carry through year-end, subject to selective defensive positioning.

  Strengths

  Average 5.31% yield to call, resilient demand, improving structural protections and investment-grade issuer base.

  Weaknesses

  Compressed absolute spreads and substantial primary-market activity.

  Comparison

  Viewed as more attractive than financial hybrids, AT1s, bank Tier 2 and BB senior debt on risk/reward grounds.

  Risks

  Rate volatility, weak issuer fundamentals, insufficient compensation for weak structures and selective extension risk.

• Volkswagen hybrids

  Barclays identifies value in selected high-reset structures.

  Strengths

  Resilient cash generation, significant liquidity, reduced hybrid stack and supportive technicals.

  Weaknesses

  2026 profitability deterioration and execution risk in the Future Plan 2030.

  Comparison

  IG-rated hybrids are priced as BB and offer a pickup versus seniors and the broader hybrid market.

  Risks

  Rating pressure, downgrade-related technical volatility and restructuring execution risk.

• TenneT Holding hybrids

  Special-situation opportunity linked to group restructuring.

  Strengths

  Shrinking HoldCo structure, c.€1.1bn of debt remaining and no expected HoldCo issuance through 2030.

  Weaknesses

  Legacy HoldCo structure is in run-off.

  Comparison

  Distinct from directly funded, regulated TenneT Germany.

  Risks

  Outcome of future calls, tenders or liability-management activity.

• Heimstaden Bostad hybrids

  Barclays recommends selling specified bonds.

  Strengths

  High reset spread on the €6.25% NC30 reduces some non-call concerns.

  Weaknesses

  Lowest-rated residential landlord in coverage and highly interest-rate sensitive.

  Comparison

  Long-end valuation faces refinancing-related pressure.

  Risks

  Two near-term resets totaling €1.1bn, potentially high refinancing costs and sustained long-end pressure.

Key data

• European corporate-hybrid issuance in 2026 YTDMore than €49bn36% came from first-time issuers; Barclays expects full-year supply to exceed €50bn.
• New issues underperforming since issuancec.50%Despite this, primary-market activity was well digested.
• Average yield to call5.31%Excluding REITs; cited as attractive defensive carry.
• Senior-sub spread differential118bpVersus 108bp YTD average, 109bp LTM average and 92-131bp LTM range.
• Expected near-term senior-sub differentialBelow 130bpBarclays' expectation, supported by structural improvements and constructive investment-grade credit views.
• Upcoming first-call datesc.€25-30bn per year in 2027-29Heavy calendar, but Barclays says proactive liability management has reduced bottleneck risk.
• Share of YTD supply from high-quality non-cyclical issuersc.60%Mostly utilities, energy and telecom names.

Impact & implications

Barclays' conclusion is that corporate hybrids can provide attractive carry without abandoning investment-grade issuer exposure, but broad asset-class compression makes issuer quality, call economics, reset protection and relative valuation decisive. The institution favours defensive sectors and bond-specific switches rather than indiscriminate exposure, and regards real-estate hybrids and weaker or non-S&P-rated structures as areas requiring greater caution.

Risks

• Compressed senior-sub spreads could reverse if rate volatility or broader credit weakness drives decompression.
• Yield demand may underprice weaker issuers, non-S&P-rated structures or hybrids issued primarily for rating preservation, increasing secondary-market underperformance risk.
• Extension risk is elevated for sub-investment-grade, non-S&P-rated and real-estate issuers, where refinancing incentives are weaker.
• Heavy 2027-29 call calendars and issuer-specific refinancing needs may create supply pressure in selected curves.
• French political developments ahead of the 2027 presidential election may increase volatility for affected French issuers.

What to watch

• Whether fourth-quarter primary issuance slows as Barclays expects.
• The senior-sub spread differential, especially whether it remains below 130bp.
• Investment-grade credit conditions and rate volatility at the long end of hybrid curves.
• Issuer refinancing, call and replacement behavior ahead of the heavy 2027-29 first-call calendar.
• Rating-agency actions and changes in S&P rating treatment or issuer-rating status.
• New supply and refinancing conditions for real-estate issuers, particularly Heimstaden Bostad, Grand City and Aroundtown.