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Capital Markets

Hybrids: The NAIC strikes again

The cost of raising tier 1 capital has increased on both sides of the Atlantic, but there might be light at the end of the tunnel.

Yet another hybrid security was categorized as equity last month by the National Association of Insurance Commissioners via its Securities Valuation Office. The whole subordinated financial sector reacted badly to the ruling that a RBS yankee tier 1 security would classified as equity, making it prohibitively expensive for US insurers to invest in.

The 5.512% RBS Capital Trust III, tier 1 due 2014 immediately widened to 159 -169 basis points over treasuries. This yankee was previously quoted at 131–127 basis points over treasuries.

Although the move does not directly affect European investors, the European market widened because the discrepancy between US and European institutional spreads could not be maintained.

How RBS’s yankee reacted to NAIC
Yield of RBS 5.512% capital trust III tier 1, call 2014
Source: Bloomberg

In Europe, high-quality tier 1 names such as UBS widened to high 70s over Euribor compared with the low 60s before the latest NAIC blow. The sterling capital market was hurt too, with spreads some 10 to 15 basis points wider. Market participants remain bewildered by the lack of transparency apparent in the affair.


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