With the credit and liquidity crises continuing to be played out on the global stage, borrowers’ access to capital has become an increasingly core subject. Even as the situation persists, regulatory bodies are forging ahead with their efforts to lay the foundations of all-encompassing legislation, drafting pre-prescribed directives regarding hybrid capital, transcending jurisdictions and issuer types.
While some feel, given the prevailing conditions, a rain-check would be in order, others maintain any delay would be detrimental. Talk about regulatory reform has gone on long enough, they say: now is the time for action.
Both schools of thought were represented at IFR’s Hybrid Capital Roundtable, an event that managed what many regulatory and rating agency enterprises seemingly have not: canvassing the opinions of all corners of the market – issuers, investors and investment bankers alike.
The resulting conversation highlighted the difficulties enshrined in such exercises, especially when the approach is piecemeal. Of course everyone wanted a level playing field, but there was also a general concern regarding the dangers of overly prescriptive measures, which could prove counter productive.
The current environment has thrown up a situation where instruments will be stress tested in practice, rather than just theory. It will be possible to establish some much-needed data points to ascertain the effectiveness of the various structures, and whether or not they behave in the manner expected. This will proffer some answers, but almost certainly an equal number of questions.
Along with coupon deferral, chief amongst these is the thorny question of call options and whether or not they will be exercised. While, from a purely economic standpoint, it would appear many should probably not be, there are a number of other factors at play, not least is the potential reputational damage resulting from a failure to do so. This would likely result in an inability to access the markets.
With representatives from all sides of the industry, this and many others questions were addressed during the course of the discussion. The stimulating debate produced conflicting views without ever descending into acrimony. While the consensus was that there is not always a consensus, some bodies could take a leaf out of IFR’s book and consult all the various market participants rather than relying on just one or another, or even none, as far as some proposals appear to be concerned.