Hybrids: A lack of common sense?
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Hybrids: A lack of common sense?

NAIC’s SVO brings further woe to the hybrids industry; the US market looks less viable than it once did.

Vinod Vasan, head of capital products group, debt capital markets, at UBS Vinod Vasan: “NAIC? It’s obviously all a bit confused”

It has been apparent for about three months that the status of the US institutional market as the default arena for hybrid issuance is under threat. Now those fears have been confirmed. For many years the US has been an automatic port of call for bank and insurance hybrid capital issuers, especially those wanting size. Bankers now say that the depth and liquidity of European investors will be tested more frequently by issuers from both sides of the Atlantic. Interest from the biggest single base of US buy-and-hold investors for new style hybrid issuance was significantly curtailed when the National Association of Insurance Commissioners’ (NAIC) Securities Valuation Office (SVO) classified another round of instruments as common equity.

The bad news this time around centred on Wachovia’s $2.5 billion structure called Wits (Wachovia interest trust securities) sold earlier this year in February and structured by Goldman Sachs.

The alternative silos were preferred and debt, which attract a much lower risk weight (0.3% versus 30% for a US life insurer). The market was dismayed by Wits’ designation and moved 10 to 15 basis points wider.

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