TEXT-S&P publishes FAQ on equity content in dated bank hybrids

(The following statement was released by the rating agency)

Oct 12 - Banks' interest in issuing dated deferrable hybrid capital seems to be rising. Yet these structures would not qualify as regulatory Tier 1 capital under Basel III. The emerging issuance trend puts the spotlight on the equity content of dated deferrable hybrid capital. In a Credit FAQ titled "Why Banks' Dated Deferrable Hybrid Capital Instruments Often Have Minimal Equity Content," Standard & Poor's Ratings Services' sheds light on its criteria for analyzing bank hybrid capital and how the features of such structures affect its assessment.

We understand that several banks are considering issuing dated deferrable Tier 2 capital instruments that, according to our criteria, may have intermediate equity content. By contrast, we had anticipated that new bank hybrid capital would be predominantly perpetual noncumulative instruments with features allowing the write-down or conversion of principal into common equity, or other forms of contingent capital. This was in light of developments in Tier 1 regulations. The shift we have observed toward cumulative, dated instruments is, in our view, a step backward in terms of the equity content of bank hybrids.

The article looks at dated subordinated bank capital instruments that can only absorb losses via coupon deferrals, which Standard & Poor's generally expects to classify as having minimal equity content.

((Bangalore Ratings Team, Hotline:+91 80 4135 5898 Jyothsna.BN@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging:Jyothsna.BN.thomsonreuters.com@reuters.net))