The Neuberger Berman Corporate Hybrid fund will be run by investment grade credit portfolio managers Julian Marks and David Brown and will have seed capital of $21m. The group currently manages about $500m in dedicated corporate hybrid mandates, primarily for Japanese institutional clients.
Corporate hybrids currently form around 3% of Euro Investment Grade credit indices, and are issued by well-known, investment grade corporates. They have a higher yield than senior bonds from the same issuers – over 4% on average – but rank lower in the event of default. The market is currently $120bn, with forecasts for new issuance of $25bn to $30bn.
Issuers can suspend coupon payments on hybrid debt without triggering a technical default but if they were to do so, the company could not pay equity dividends again until all missed coupon payments were met with interest paid.
Julian Marks, global credit portfolio manager at Neuberger Berman said: “We believe these bonds are currently trading on average over 100bps wide of fair value. Also, we believe the large amount of new issuance is likely to continue coming at a discount, providing an additional source of return.
He added: “The appeal of issuing hybrid debt is clear for corporates, as these instruments provide significantly cheaper funding compared to equity capital. Coupons on hybrid debt are fully tax-deductible, while dividends on equity are not. Companies can issue hybrid capital without diluting voting rights of existing shareholders, while equity credit from rating agencies supports credit ratings. Most hybrids receive 50% equity credit at issuance. In addition, the optionality afforded on coupons and calls of hybrids is another attraction relative to senior debt.”
