FIIG - The Fixed Income Experts

News and Education

S&P puts hybrids on positive watch

by Emma Jenkin | Sep 19, 2012

The Australian regulator of banks and insurers, APRA, has relaxed an approval requirement on distribution payments on Tier 1 and Tier 2 securities – often referred to in Australia as hybrid securities. APRA announced that they will no longer require the issuers of Tier 1 and Tier 2 securities to seek approval prior to making distribution payments where the amount would exceed after tax earnings (distributable profits test). The removal of this requirement has seen Standard & Poor’s, a ratings agency, put 38 Australian hybrids (Tier 1 and Tier 2 securities) on CreditWatch positive. This reflects the reduced risk of non-payment of distributions on these securities due to APRA disallowing their payment. It is worth noting that this written approval from APRA was only required where the payment would exceed the after tax earnings of a bank or insurer and was not a requirement for other issuers.   

S&P CreditWatch positive means that S&P are reviewing the number of notches below senior debt that they apply to Tier 1 and Tier 2 securities. These notches reflect the structural subordination and equity-like features of hybrid securities. This provides one measure of the equity-like nature of hybrids – the more notches a security is rated below the issuer rating the more equity-like. S&P has stated the maximum notching reduction would be a single notch and may not apply universally to all securities. This reduction reflects the improvement of investors’ position with the removal of the APRA approval requirement.

To provide investors with a point of comparison for various hybrid securities the following table outlines notching for a selection of over the counter (OTC) and listed hybrids:

Note the securities in italics are on CreditWatch positive

This analysis is limited as it ignores the issuer’s credit position which is obviously a very important factor in any investment decision. For example, the above table is not saying that an investment in the CBAPA is more risky than AXA BBSW + 1.4% but compares how S&P views the differences in security structures. 

APRA will provide further detail by the 30 September and S&P will finalise their CreditWatch process over the next 90 days subject to any clarifications from APRA.

For more information about NAB Caps, Rabo, Swiss Re, National Wealth or AXA please call your local dealer.