Companies lose equity and faith on S&P news

Fri Oct 30, 2015 8:08am EDT
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* New criteria turns hybrids into expensive senior debt

* Reinstating lost equity could be costly

* S&P move could re-price hybrid market

By Laura Benitez

LONDON, Oct 30 (IFR) - Standard & Poor's shock removal of the equity content it had assigned to 29 corporate hybrid bonds has shone an unfavourable spotlight on the sector and forced both investors and issuers to rethink the risks of this year's in-vogue product.

Fourteen corporate issuers are now servicing around 20.5bn of expensive senior debt after the equity credit of their hybrids - which justifies the more costly coupon - was removed on Tuesday.

"We were contacted on Monday, but S&P had already made up their minds. It was a quite a surprise to say the least, although we knew it had been an issue because S&P had denied a recent issuer the same clause for its hybrid issue just a few weeks ago," Johan Gyllenhoff, group treasurer at Vattenfall told IFR.

S&P said it made the decision because it expects hybrids to be a permanent and loss-absorbing part of a company's capital structure, and not be callable on the off-chance that the bond loses equity treatment due to a rating downgrade, for example.

"There's a lot of anger out there," one syndicate official said. "The way S&P communicated the news was utterly incompetent; they didn't give the companies the chance to rectify the issues at hand, which seems highly unfair."   Continued...