SQM joins Chile’s hybrid bond boom to finance major investments

SQM issued 10 million UF in hybrid bonds at a 3.84% yield, following Arauco and CMPC in using this instrument to fund large capex plans while protecting their investment-grade credit metrics.

Lithium heavyweight SQM has become the third Chilean company in the past four months to issue hybrid notes in the local market, as major corporates look for ways to finance multi-billion dollar investment plans without putting undue pressure on their credit scores.

SQM sold 10 million Unidades de Fomento (UF) — an inflation-linked accounting unit equivalent to about US$432 million — at a 3.84% yield, following similar transactions earlier this year by forestry players Celulosa Arauco y Constitución (Arauco) and Inversiones CMPC.

Hybrid bonds have surged in popularity globally since 2024. In Chile, they are emerging as a key tool for issuers that need to raise large amounts of capital but want to protect their investment-grade ratings.

Why hybrids? More expensive, but rating-friendly

Hybrid bonds typically:

• Include coupon step-ups if the issuer fails to call the notes at the first call date.
• Are treated partly as equity by rating agencies — often around 50% equity / 50% debt.

That structure means they limit the apparent growth of leverage on the balance sheet, helping issuers finance expansion without triggering a downgrade. The trade-off is clear: higher coupons than senior bonds, but better rating metrics.

The debt comes “with an attractive trade off,” said Francisco Mohr, head of fixed income at BTG Pactual Asset Management in Chile. “It pays more than traditional debt, but improves rating metrics, reducing the risk of a downgrade.”

SQM is rated BBB+ by S&P, CMPC BBB and Arauco BBB- — all clustered at the lower end of the triple-B investment-grade category.

Hybrid bonds “act like subordinate debt,” noted Diego Pino, head of trading and equity at Scotia Corredores de Bolsa. “But the companies that have carried out these transactions are sufficiently big and solid to be able to place them.”

Forestry issuers opened the door — with record-sized deals

The forestry sector led the way in Chile’s hybrid wave this year:

• CMPC
  First local hybrid issue of 2025.
  Size: 10 million UF.
  Coupon: 4.19%.
  Spread: 230 bps over the Central Bank UF bond of equivalent term and 110 bps above its senior debt.
• Arauco
  Followed two months later.
  Size: 20 million UF, the largest corporate bond issuance in Chilean history.
  Yield: 3.97%, or 168 bps above the reference rate.
  The final yield came in below the initial 4.5% registered, signalling strong demand.

SQM’s hybrid also tightened meaningfully, with the yield moving from an initial 4.4% to 3.84% at placement.

According to Pino, these bonds typically offer investors 80 to 100 basis points more than a traditional senior bond from the same issuer.

On top of the local deals, Inversiones CMPC issued a US-dollar hybrid bond in the US market just a week after its Chilean sale, confirming that Chilean corporates are increasingly comfortable using hybrids both at home and abroad.

Part of a wider Latin American hybrid trend

Chile has been a regional pioneer in hybrid instruments:

• AES Andes was the first South American company to sell dollar-denominated hybrid bonds in 2013, returning to that market in 2019.
• BancoEstado placed AT1 instruments — a bank-focused hybrid structure — in 2024.

More recently, hybrids have spread across Latin America:

• Mexican cement giant Cemex issued US$1 billion in hybrid bonds in September 2023.
• Corporación Andina de Fomento (CAF) sold US$500 million in June of this year.

All of these issuers share a similar profile: heavy capex needs and a strong incentive to protect their investment-grade ratings.

High capex: Arauco, CMPC and SQM ramp up spending

Hybrid notes are sold “with an explicit objective of defending a high international investment grade rating and a robust balance sheet as companies step up investment,” Mohr said. The pattern is particularly visible in pulp and paper, energy and utilities.

Investment figures help explain the wave:

• Arauco
  Capex reached US$897 million in the first nine months of the year.
  On track for its highest annual level since 2022.
  Needs to keep financing its Sucuriú pulp project in Brazil, a large mill with a US$3 billion price tag.
   
• CMPC
  Investments totalled US$653 million over the same period.
  Heading toward a ten-year high in capex.
  Is planning another pulp mill worth more than US$4.5 billion, which could be built in less than three years if the board approves it in 2026.
   
• SQM
  Has a three-year capital expenditure plan of US$2.7 billion, tied to expansion in lithium and other businesses.

“The main aim of hybrid bonds is to support the credit classification of the issuer,” said Deneb Schiele, director of corporate finance and head of capital markets at Scotiabank. “That has been the object behind recent emissions, especially in the scenario of low commodity prices and heavy investment.”

More hybrid issuance likely to come

Given the scale of current and planned investments, analysts say it is plausible that these companies — and other large issuers — could return to the hybrid market, provided conditions remain supportive:

• Investors must maintain an appetite for long-duration UF instruments.
• Rating agencies must continue to grant equity credit to hybrids.
• Issuers will need to ensure that hybrid tranches stay within investment grade, avoiding a slide into high-yield territory.

“It is reasonable to expect that other investment-grade issuers with relevant investment plans will study similar structures, provided that the appetite for UF duration is maintained and the agencies continue to grant equity credit,” Mohr said.

With SQM now in the mix, hybrid bonds are cementing their role as a core financing tool in Chile’s corporate market, especially for capital-intensive companies that need to balance growth, leverage and rating stability in a more demanding global funding environment.