Corporate hybrids are quietly transforming fixed income portfolios. By bridging the gap between investment-grade credit quality and attractive yields, these instruments typically offer enhanced income without a meaningful compromise on issuer quality. As bonds with equity-type features, the use of hybrids has flourished in recent years, evolving from a predominantly European funding mechanism into an increasingly global asset class with deepening U.S. roots.

A growth catalyst for the sector came in 2024, when a Moody’s methodology shift allowed companies to use hybrids to raise capital and maintain investment-grade ratings while avoiding equity dilution. As a result, U.S. issuance of corporate hybrids surged from $6.7 billion in 2023 to $32.4 billion in 2024, closing out 2025 at $43.6 billion, as hybrids move from a niche instrument to a widely used funding tool.

For investors, corporate hybrids offer a unique risk-return proposition. To access yields above investment-grade debt, investors accept additional structural subordination, rather than weaker underlying credit quality. This distinction means hybrid risk is architectural rather than fundamental, where issuers are often large investment-grade companies with strong financials.

For index investors and ETF issuers, the ICE USD Developed Markets Corporate ex banks Hybrid Bond Index (CIDM) provides a dedicated benchmark for this space. The index tracks the performance of US dollar-denominated hybrid corporate debt publicly issued and settled in the US domestic market. Among other criteria, the index excludes contingent capital securities and securities designated as 'banking' based on the proprietary ICE fixed income sector classification schema. Banks are excluded from the index as their risk drivers are fundamentally different from corporate hybrids. To qualify, among other criteria, securities must carry an index rating of BB2 or higher and feature a fixed coupon schedule — Fixed-to-Floating rate structures are eligible provided they remain callable within the fixed-rate period. The result is a rules-based index designed to capture the opportunity in U.S. corporate hybrids.

Corporate hybrids are subordinated debt instruments issued by non-financial corporates and non-banking financial institutions such as insurers. They sit below senior unsecured bonds but above equity in the capital structure. Issuers can defer coupon payments under specified conditions without triggering legal default. Rating agencies grant partial equity credit for these loss-absorbing features.

For issuers, hybrids serve as a cost-effective tool to strengthen balance sheets and support credit ratings while limiting shareholder dilution. The issuer universe is dominated by large, frequent issuers with established capital market access such as utilities, insurers and energy infrastructure companies.

The spread premium that corporate hybrids offer over senior bonds from the same issuer is compensation for three structural features: subordination in the capital structure, the optionality for issuers to defer coupons, and call/extension features.

The USD corporate hybrid market experienced a step-change in 2024, catalysed by a pivotal update to Moody’s rating methodology. In February 2024, Moody’s increased the equity credit assigned to US hybrid securities from 25% to 50%, bringing them on par with preferred securities — but with the significant added benefit of tax-deductible coupons. This made hybrids a considerably more attractive capital structure tool for US corporate treasurers.

USD corporate hybrid supply surged from approximately $6.7 billion in 2023 to a record $32.4 billion in 2024, led by utilities, energy, and healthcare issuers. The methodology change also reshaped the preferred securities market, as some issuers redeemed existing non-tax-deductible preferreds in favour of tax-deductible hybrids, contributing to net redemptions in the $25 par preferred segment.

Corporate hybrids also have characteristics that are relevant for insurance company allocators. Under Solvency II, these instruments are subject to spread risk and interest rate risk Solvency Capital Requirements ("SCR"), with no equity risk charge applied. Interest rate risk is typically calculated based on the first call date as most hybrids reset to a floating rate after the first call. The spread risk SCR, which is the dominant charge, is a function of credit rating and modified duration — and since hybrids are typically called at the first call date, many insurers calculate the SCR using duration to that date rather than to legal maturity, which can meaningfully reduce the capital requirement. The result is a yield-on-SCR ratio that compares favourably to other fixed income alternatives at similar credit quality.

CIDM excludes bank capital instruments to isolate the corporate hybrid opportunity as a distinct allocation.

Distinct asset classes

While bank and corporate hybrids are both hybrid instruments, they serve fundamentally different purposes in the capital structure — particularly in the case of bank AT1s and contingent convertible bonds (CoCos). AT1s are issued by banks as regulatory capital, with triggers tied to capital adequacy ratios and supervisory intervention. Corporate hybrids are issued by non-financial corporates and non-bank financial institutions as a capital management tool, with risk profiles driven by business fundamentals and issuer cash flows.

The case for separate allocations

Bank AT1s offer their own structural yield premium and play an important role in fixed income portfolios, but their risk drivers — regulatory capital requirements, supervisory discretion, and banking sector dynamics — are fundamentally different from those of corporate hybrids. The March 2023 banking stress period illustrated this distinction, as bank capital instruments and corporate hybrids exhibited different performance patterns in response to sector-specific events.

CIDM’s design rationale

CIDM’s exclusion of banking sector securities and CoCos isolates the corporate hybrid opportunity as a distinct allocation. The index includes insurance and financial services issuers, so the exclusion is specific to banking sector instruments rather than financials broadly. For investors who also hold AT1 or preferred securities exposure, CIDM provides a complementary building block with different sector composition, shorter duration, and no overlap with bank-dominated benchmarks.

Index rules

Historical returns for hybrids (CIDM) sit between high yield (H0A0) and IG (C0A0)

A transparent assessment of risks is essential for informed allocation:

Corporate hybrids have characteristics that may be relevant across several portfolio contexts:

Within a global IG allocation, CIDM’s effective yield of 6.11% and duration of 4.75 years sit between senior IG and traditional high yield on both dimensions. The index’s IG-tilted average rating of BBB3 means it remains within the credit quality range of many investment grade mandates.

For investors whose benchmarks carry significant financials weight, CIDM’s exclusion of banking sector securities means exposure to sectors that are less represented in typical European credit allocations - such as utilities, insurance, energy infrastructure, and telecoms.

As a complement to existing preferred securities or AT1 exposure, CIDM provides corporate-focused subordinated debt with different duration, sector, and risk characteristics. For investors holding both corporate hybrids and bank capital instruments, the two represent distinct parts of the subordinated debt universe.

The following table summarises the key characteristics of CIDM relative to the two comparison indices discussed.

Corporate hybrids offer a structural yield premium that is rooted in instrument design — subordination, coupon deferral optionality, and call features — rather than in deteriorating credit quality. The issuers are predominantly large, investment-grade-rated corporates in stable sectors with established capital market access.

CIDM provides a rules-based, transparent benchmark for accessing this segment. By excluding bank capital instruments and CoCos, it isolates the corporate hybrid opportunity as a distinct allocation. With an 8% issuer cap, monthly rebalancing, and over a decade of live history, the index offers a disciplined framework for investors evaluating the role of corporate hybrids within their credit portfolios.