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Capital Markets

Hybrids: NAIC resolution some way off

Will US issuers start to look at Europe’s institutional markets?

“Temporarily the US institutional market is less receptive to perpetual issuance. That's one of the reasons why more deals are going into US retail”
Sid Prasad, Merrill Lynch

Market participants’ hopes that some clarity would emerge from a conference call held in mid April by the National Association of Insurance Commissioners’ Securities Valuation Office (SVO) on its classification of hybrid securities were dashed. The NAIC merely informed participants of its general practice on classifying securities. Many market participants expressed frustration about the continuing impact the NAIC’s decision to classify Lehman’s ECAP as common equity is having [US hybrids: Should we panic over ECAP?, Euromoney, April 2006]. That decision was made following the US insurance regulator’s observation that insurance companies were reporting trust preferreds and other hybrids as bonds, something that it was apparently unhappy about. There are three capital asset categories in which insurance companies can place their securities investments – debt, preferred equity and common equity. Insurance investors are required to hold significantly greater amounts of capital against common equity than against preferreds or debt.

Flexibility

Much to investment bankers’ chagrin, the NAIC has not provided much clarity on the exact rationale for its decision on ECAPs.

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