Hybrid bond borrowers should find the institutional US market a more welcoming place in the coming months now that the US National Association of Insurance Commissioners has put in place new rules that dramatically reduce the amount of risk-based capital that insurers, perhaps the most important investor base, will typically have to allocate to their holdings of the new wave of hybrids that has emerged since August 2005.
“In September the NAIC came up with a resolution that addressed their concerns that some of these hybrids were more risky than typical preferred, but reflecting the fact that these securities were nevertheless not as risky as common stock,” says Dominique Jooris, executive director, co-head debt capital markets hybrid capital, Europe, at Goldman Sachs.
It is a face-saving exercise that provides a better gauge to assess the risk of hybrids without flying in the face of a series of NAIC judgements that have identified these securities as being as risky as common equity.
As shown by the table, hybrids will from now on be placed in three silos, based primarily on credit rating: NAIC–1, NAIC–2 and NAIC-3.
Buckets
The old regime’s three buckets into which securities were placed were debt, preferred and common equity.