Not so funny money

19 August 2013 By Neil Unmack Follow @unmack1

The rating agency’s decision that junk-rated hybrid bonds are entirely debt and not quasi equity highlights the changeability of this funny money. The fallout is limited for now. But it’s another reason for companies to think twice before issuing hybrids, and investors before buying.

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Moody’s Investors Service published on July 31 its methodology for assessing hybrid bonds issued by sub-investment grade companies.
The methodology states that instruments with a debt claim should be treated as debt when calculating financial metrics for issuers rated below investment grade.
The approach “closely follows the legal treatment these instruments would likely receive in a bankruptcy scenario,” Moody’s said.
Hybrids are long-dated, subordinated bonds which typically can defer interest payments. These features allow rating firms to view some - usually half - of the amount issued as equity when measuring companies’ debt ratios and interest

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