The US market for the latest types of hybrid securities is again gathering steam in spite of a new regulatory ruling likely further to discourage insurance company buyers, which until recently were buying about 20 per cent of new hybrids.
The willingness of issuers and bankers to launch new deals suggests strong institutional appetite even without insurers, who have steered clear of the instruments since a surprise decision by the National Association of Insurance Commissioners in March made it expensive for them to own certain hybrids.
The NAIC’s Securities Valuation Office, or SVO, underscored its earlier decision with an advance ruling on a new Lincoln National hybrid, unveiled by the US insurer on Tuesday.
In its preliminary prospectus for the deal, the insurer said the SVO had decided it would “preliminarily designate [hybrids of the type being offered] as common equity for purposes of calculating the statutory risk-based capital requirements of US insurance companies that hold such capital securities.” Insurers have to hold more capital against common equity investments than other types.
The decision echoes the SVO’s March ruling on a Lehman Brothers hybrid with similar features, which sent ripples through the market and held back what some on Wall Street had expected to be a flood of issuance.
Tax authorities and most investors consider recent hybrid structures to be more like risky debt or preferred shares than common shares – an important factor in their cost-effectiveness for issuers.
Rating agencies and regulators, however, recognise equity-like features in the securities – the dilemma that led insurance regulators to examine the Lehman hybrid in the first place.
In spite of the ruling, Lincoln is going ahead with its $500m-$1bn hybrid issue, coordinated by Morgan Stanley, Citigroup and Merrill Lynch, to help refinance its acquisition of Jefferson Pilot. The insurer recently sold a similar $275m hybrid to the retail market, partly because of uncertainty over institutional demand.
That changed last week when Swiss Re, the reinsurance group, found strong demand among institutions for a $750m hybrid in spite of the participation of very few insurance companies and the absence of any guidance from the SVO.
