Insurers cool on new bank bonds

UK insurers have dealt the banking industry a blow with their recent snub of proposed new bond types, according to rating agency Moody’s.

Last week, the ABI gave a frosty reception to plans for banks to raise funds by issuing so-called contingent capital and bail-in bonds rather than regular bonds.

These new types of bonds are designed to effectively expose holders to losses if a problem with the bank arises. They do this either by converting to equity or forcing the holder to write down the value of the bond when trouble hits.

With contingent capital, the trigger point for the conversion or devaluation is pre-agreed between the holder and the issuer. With bail-in bonds, the regulator decides when the trigger is pulled.

Bonds make up the majority of most insurers’ investment portfolios, but while supporting the principle that banks’ regulatory capital should be loss-absorbing, the ABI said there would be limited interest in the new bond types.

It said the new instruments were a hybrid between debt and equity, but with none of equity’s growth potential and few of the defensive properties of traditional bonds.

“Only high-yield investors are likely to be interested in the risk/reward profile of contingent capital or bail-in bonds,” the association said.

Moody’s said the limited appetite from insurers for such bonds was negative for banks from a credit perspective because “it narrows the pool of potential buyers and potentially hinders the banks’ needed capital raise”.