A downgrade doesn't have to hurt a stock.
First this:
The market for the hybrid debt of British banks was rather roiled last week
First there was news that Northern Rock would be deferring payment of its suboordinated debt coupons. Then then there was a mass-downgrade of the hybrid debt of banks including Lloyds and RBS, from ratings agency Fitch. In short, things are happening in the market — and they haven’t been all that good.
As a reminder, hybrid, or suboordinated debt, has characteristics of both equity and debt, and forms an important part of banks’ capital cushions.
On Tuesday, Northern Rock deferred coupon payments on some of its hybrid debt in an effort to conserve its capital base, which has fallen below minimum requirements since the bank was nationalised in 2008. The bond payments can legally be deferred without counting as a default — something which enables them to qualify as regulatory capital in the first place.
The thinking behind Fitch’s Thursday downgrade of RBS’ and Lloyds’ hybrid debt, meanwhile, is that there’s an increased risk of other such coupon deferrals after the European Commission introduced the concept of “burden-sharing” for bond - and shareholders. That’s a nice way of saying that bondholders will have to share some of the pain involved in bank bailouts — the lack of which formed a prime criticism of bank bailouts earlier this year.
Please note that not only Britsih Banks are involved in the Fitch action also other European banks got a letter where their hybrid debt was downgraded.
First there was news that Northern Rock would be deferring payment of its suboordinated debt coupons. Then then there was a mass-downgrade of the hybrid debt of banks including Lloyds and RBS, from ratings agency Fitch. In short, things are happening in the market — and they haven’t been all that good.
As a reminder, hybrid, or suboordinated debt, has characteristics of both equity and debt, and forms an important part of banks’ capital cushions.
On Tuesday, Northern Rock deferred coupon payments on some of its hybrid debt in an effort to conserve its capital base, which has fallen below minimum requirements since the bank was nationalised in 2008. The bond payments can legally be deferred without counting as a default — something which enables them to qualify as regulatory capital in the first place.
The thinking behind Fitch’s Thursday downgrade of RBS’ and Lloyds’ hybrid debt, meanwhile, is that there’s an increased risk of other such coupon deferrals after the European Commission introduced the concept of “burden-sharing” for bond - and shareholders. That’s a nice way of saying that bondholders will have to share some of the pain involved in bank bailouts — the lack of which formed a prime criticism of bank bailouts earlier this year.
Please note that not only Britsih Banks are involved in the Fitch action also other European banks got a letter where their hybrid debt was downgraded.
However, on the Belgian stock exchange is KBC (bank) rising another 5% today.
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