Corporate hybrid bonds are subordinated, long dated instruments issued predominantly by investment grade, non-financial companies. They sit deliberately between senior debt and common equity in the capital structure, combining features of both.
Corporate hybrid securities have existed for two decades, but the asset class has just entered its most consequential growth phase yet, driven by the AI-driven capex supercycle that is changing how companies from utilities to telecoms raise capital.
US utilities are in the midst of a historic capital investment supercycle. Data centre and AI-driven electricity demand is pushing power consumption from low single-digit growth into the double digits over the next decade. Additionally, the grid needs strengthening against extreme weather, a renewed push for firm generation like nuclear and gas to balance more intermittent renewables, and continued electrification initiatives across society. The Edison Electric Institute projects that U.S. utility capex will reach ~$250 billion by 2029, roughly double the $123.8 billion spent in 2019.
Traditionally, utilities have funded investment through senior debt and common equity. But funding this buildout entirely with senior debt would pressure leverage and credit ratings, while funding it entirely with common equity would dilute shareholders and take time. Corporate hybrids are emerging as the cheaper bridge financing solution.
The attraction for issuers is that hybrids receive partial equity credit from rating agencies, commonly 50%, while coupons remain tax-deductible. That combination makes hybrids a cost-efficient alternative to a mix of senior debt and new equity. For investors, the appeal is equally straightforward: hybrids issued by strong investment-grade rated companies typically offer yields in line with high-yield bonds. That extra spread compensates for subordination and structural risk, instead of incremental default risk, since the underlying issuer’s business and credit profiles are the same.
The result is a market that has roughly doubled in total size since year-end 2023 and continues to broaden. U.S. dollar non-financial hybrid issuance grew from $6 billion in 2023 to $41 billion in 2025. 2026 full-year supply is forecast to reach $55 billion, with non-financial issuers accounting for a record 42% of total U.S. hybrid/preferred supply in the first half of 2026. Utilities are the single largest contributor, with issuance reaching $15 billion in the first half of 2026, up 100% versus the same period a year earlier.
This growth is not incidental. Utilities, pipeline companies, energy producers and telecommunications providers are hard infrastructure businesses that deliver essential, non-discretionary services such as power, gas transportation, fuel and connectivity, often as regulated or effectively monopolistic providers within their footprints. Stable, contracted or regulated cash flows and limited exposure to consumer discretionary spending or the broader economic cycle make these issuers structurally less volatile than the average corporate credit.
That underlying stability shows up directly in the hybrid market’s composition. Utilities and energy issuers together account for over half of the euro-denominated hybrid market and more than three-quarters of the dollar-denominated market, far above their weight in broader investment-grade indices. The largest issuers are large, well-diversified, investment-grade companies with decades of operating history and consistent capital markets access.
This combination of stronger underlying credit quality and structurally lower cyclicality is a key reason corporate hybrid total returns have historically exhibited lower volatility than broader investment-grade senior returns, even though the instruments themselves are subordinated. By concentrating investments on these lower-beta, infrastructure-oriented issuers, it is possible to steer clear of weaker or more cyclical corners of the hybrid universe where credit risks and volatility have been meaningfully higher.
Utilities
Utilities occupy a unique position in the current cycle, especially North American utilities. The sector is experiencing unprecedented growth, driven by a capex supercycle tied to AI and data centre power demand, while remaining backstopped by regulated, monopolistic cash flows. Utilities are capturing real upside from a generational growth story, while their regulated rate base structure continues to provide the downside protection and cash flow stability that has long defined the sector.
Bill affordability has become a prominent political issue as capex accelerates, and how regulators and utilities manage cost recovery will vary by jurisdiction. Utilities are increasingly structuring large load tariffs through long-term contracts with high breakage fees and parent company guarantees. This should help ensure that large new customers such as data centres fund the infrastructure built to serve them, rather than existing utility ratepayers.
Energy
Integrated energy firms have shifted their focus back to core oil and gas operations to better balance profitability and energy security priorities. Balance sheets across the sector have improved substantially in recent years, while long-term contracts and business-line diversification mitigate commodity price volatility.
The largest midstream pipeline companies increasingly share a credit profile like regulated utilities. Long-term contracts with high-quality counterparties mean that a substantial share of cash flow is effectively contracted or regulated, rather than exposed to commodity price movements. Midstream is also emerging as a direct beneficiary of the AI and data centre buildout, as growing electricity demand drives incremental need to transport natural gas as power generation feedstock.
Telecommunications
Telecom issuers provide essential mobile connectivity and fixed-line critical infrastructure used broadly in everyday life by retail and business customers. This durable, non-discretionary demand base provides reliable revenues and more predictable earnings. Competitive intensity varies meaningfully by market, with Europe seeing pressure on growth and profitability, while the U.S. and Canada are dominated by a smaller number of very large operators.
Whether powering the grid, moving energy or connecting customers, corporate hybrid issuers share similar core attributes: essential, hard-to-replicate infrastructure with cash flows that are regulated, contracted or otherwise insulated from the broader economic cycle. As the AI-driven capex supercycle expands, that combination provides the foundation for a growing corporate hybrid market built on investment-grade credit quality, while offering investors additional spread for structural rather than incremental default risk.
