Wednesday, November 18, 2009

The Debts of the Spenders: Moody's Puts Hybrid Capital on Negative Watch

UPDATE: Added Bloomberg MBS Link at the bottom.

Important news for those investing in hybrid capital. The Financial Times reports that Moody's and other ratings agencies are considering possible multi-notch downgrades for hybrid bank capital.

Moody’s system had previously allowed its analysts to assume that any official support given to a bank would also cover subordinated debt. But several subordinated instruments have been allowed to suffer losses during the crisis after regulators and other policymakers made it clear they expected the bondholders to share the pain felt by equity holders in bailed-out banks.

Wider ”notching” will also be applied among hybrids, with various issues rated differently depending on certain features,

The article goes on to say that UK banks in particular will suffer dramatic downgrades as a consequence. The changes will reflect the UK government's interference in the capital markets by interrupting bond payments for investors in banks like Bradford and Bingley.

I wrote about hybrid debt earlier here. Despite this potentially negative news, I am still somewhat bullish on hybrid debt b/c there has been no viable alternative proposed yet for TBTF (Too Big to Fail) and the replacement of Tier 2 capital. The Financial Times goes on to note that the market has been trading independently of ratings for some time now.

Here you can see that those hybrid debt w/an underlying Fannie/Freddie component continue to have a floor in price support. As you can see, the Fed continues its program of quantitative easing unabated. The coupons are still paying unlike the constant interruption streams from the Bank of England:

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