| I'm told that the National Association of Insurance Commissioners' recent decision (subscription required) to treat hybrid securities as equity has really thrown a monkey wrench into the market for trust preferred securities, which blend elements of debt and equity. New such securities have been issued by corporate such as Burlington Northern and Stanley Works as well as banks in hopes of reducing their cost of capital. Wall Street was only recently expecting the market for these instruments to soar this year.
Paradoxically, the insurance regulators' decision is in line with recent moves by bank regulators and rating agencies, and those moves have encouraged more issuance by banks and others. But the insurance regulators are looking at it from the other side of the fence. That is, they are evaluating hybrids from the point of view of investors, not issuers. Because equity is riskier than debt, the insurance regulators are saying, in effect, that their regulatory charges can't hold as much of it as they might otherwise. With insurers representing something like 25 percent of potential buyers, that's put a huge damper on issuance. "Nobody's doing anything," says a banker who asked not to be identified. "If you don't have insurance companies" as investors, the banker notes, "then there will be no liquidity, so issuers are holding off."
Since the commission is heavily influenced by the New York state insurance department, the banker says she's heard that calls have made to the offices of Governor Pataki and Mayor Bloomberg to try to put pressure on the regulators to change their minds. Meanwhile, says the banker, she's being asked to structure deals around the decision, but says that's impossible since the regulators haven't explained their reasoning.
I've a lot more to say about this, of course, but I don't want to give away the contents of my upcoming column on the subject. So stay tuned.
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