Commentaries

Now raising intellectual capital

Good hybrid crack

It’s interesting to see the Irish government seems to have been keeping a close eye on the hybrid debt fiasco, as it is now embracing the securities as a way to ensure the country’s banks don’t get an easy ride offloading dud property loans to NAMA, its bad bank scheme. I guess you could call it a form of payback.

Hybrid debt has played its own special role in creating the current mess.
Banks used hybrid debt to bolster their capital ratios even though the securities weren’t always very good at absorbing losses.

Investors kidded themselves that these risky capital securities were fixed income instruments that would always be supported by governments if a bank got into trouble, and so priced them as a form of debt.

But, now that banks have had to be bailed out, the European Commission is keen for hybrid investors to pay their pound of flesh by getting banks to defer coupons, not repay bonds at their expected maturity, or worse. CreditSights expects the EC to compel some Irish banks to stop paying discretionary coupons on their hybrid debt as part of the state-aid approval process.

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