* Credit selection more crucial as bonds trip on volatility
* Limited headroom on corporate hybrids after YTD 3.2%
* Enel deal eyed as some peripheral issues feel the pinch
By Josie Cox
LONDON, June 7 (IFR) - Corporate hybrids' sharp
outperformance year-to-date has run into a pick-up in global
volatility that has hit high beta instruments hard, meaning that
investors must now work on credit selection if they want to
avoid being burnt.
The softening market has analysts raising concerns the
subordinated product may no longer be compensating investors
sufficiently for risk, especially after a rally that has
surpassed almost every other credit sector.
Hybrids have been described as the "go-go sector" of 2013
following record issuance. So far this year, around
EUR17bn-equivalent of European non-financial subordinated
hybrids have priced in US dollars, euros and sterling.
According to Barclays credit strategists, corporate hybrids
have returned around 3.2% so far in 2013 - trailing only bank
Tier 1s, and notably ahead of high yield and lower tier 2 debt.
"Average hybrid spreads touched the tights last seen
in the spring of 2011, which speaks to the diminishing room for
further performance," they wrote on Friday.
Hong-Kong based conglomerate Hutchison Whampoa's EUR1.75bn
perp non-call 5 Reg S bond, which printed with a record-low
coupon of 3.75% in May, illustrates the risk investors now face.
The deal has dropped some 4 points in price terms to around
96, for a yield of 4.68% on Friday.
"Hybrids remain an important and valuable tool for many
companies but the blip in markets has served as a rude awakening
that they will be the first to suffer when times get tough," a
syndicate banker admitted.
ENEL BETA BLOCKBUSTER
Some are now questioning whether the volatility will have
implications for Enel, which on Friday finished marketing a
potential triple currency hybrid, tipped to be EUR2-3bn in size.
The Italian utility, one of the world's most indebted, could
end up paying significantly more than it expected, following a
near 25% widening in the iTraxx Main index over the last three
Sources close to the deal have now said the issuer may wait
for more stable market conditions, but on the flip side,
investors are still upbeat about Enel's issuance prospects.
Syndicate officials agreed, pointing to the high volume of
reverse inquiry for the potential trade, and highlighting that
subordination premiums and the structure will be crucial to the
But if the deal is launched into a weak market, this could
add more pressure on to what is already showing signs of being
an ailing sector, Societe Generale credit strategy Suki Mann
Jens Vanbrabant, London-based portfolio manager at ECM Asset
Management, said he would recommend not taking too much
directional risk until there is a solid catalyst for a rally.
"This is particularly true for hybrids which are high beta
instruments by nature.
Arcelor Mittal's 8.75% USD650m perp NC5.5 and the triple
tranche hybrid by BG Group, which have both performed strongly
since pricing last year, are among the hybrids that Barclays
The bonds have gained 7 and between 9-12 points since
pricing last year in September and June, respectively, leading
analysts to question how much upside is left.
The strategists say that they would still recommend buying
hybrids from defensive names in the utility, industrials and
"Further performance in corporate hybrids is likely to
depend more on the correct security selection with fundamental
and bond structure considerations coming back to the fore."
(Reporting By Josie Cox; editing by Natalie Harrison and Alex