PrefBlog

… at least until the wind changes:

Bank of America Merrill Lynch (BAC.N) reversed its position for a second time on Wednesday to decide its bond indexes would not include new contingent capital securities, devised for UK bank Lloyds (LLOY.L).
On Tuesday the U.S. bank said it would include these new bonds in its benchmark indexes, but many investors objected.

“The preponderance of feedback that we have received from investors who are measured against our indices indicates that most do not view the new contingent capital securities as part of their investment universe,” Bank of America Merrill Lynch said in a research note.

The Association of British Insurers (ABI) said on Tuesday its members were against including these new securities in bond indexes.
…
BofA Merrill Lynch had originally planned not to include the new bonds in its indexes, but then changed its mind on Tuesday.

“We have decided to evaluate the new securities on their own merits and will revert to our original decision to exclude them from the indexes,” Merrill’s research note said.

The note also said the bank would review all bank Tier 1 debt – the lowest ranking bank bond that has equity-like features – currently in the index to determine if there are, in fact, other securities that should be removed from the index.
…
No decision has been made yet for the iBoxx indexes, a leading benchmark in the investment grade arena, said Markit, which runs the indexes.

Markit’s oversight committee, made up of asset managers, regulators and consultants, is expected to meet next Tuesday to discuss a recommendation on this issue, Markit said.

Barclays Capital has already decided that contigent capital securities that are convertible to equity will not be eligible for broad-based investment-grade Barclays Capital bond indexes such as the Global Aggregate, Sterling Aggregate and US Aggregate indexes.

The new securities would also not be eligible for the bank’s high-yield benchmark indexes, but might be eligible for Barclays Capital Convertible Bond indexes, provided they meet inclusion rules, Barclays said.

I reported last week that UK authorities were promoting inclusion with the presumed purpose of widening the investor pool.

Two amusing things about this article are, firstly: “We have decided to evaluate the new securities on their own merits” which the smiley-boys at Merrill consider to be worthy of note, and secondly, that the stated reasons for exclusion have nothing whatsoever to do with whether these notes are bonds are not.

Can the issuer avoid bankruptcy while being a day late or a dollar short in their payments? No? Then it isn’t a bond.

Update: For all that, the issue is popular:

Lloyds Banking Group said yesterday that it may increase its capital-raising by £1.5 billion to £22.5 billion because of a clamour by investors to take up its offer to swap debt into equity.

Shares in the beleaguered banking group rose 5 per cent to 89¼p on the latest positive signal from the bank.

Investors are flocking to take up Lloyds’ offer to convert their tier 1 and tier 2 debt into new “contingent capital” because it will guarantee them an income of possibly 10 per cent or more in an annual coupon.

This entry was posted on Wednesday, November 11th, 2009 at 7:40 pm and is filed under Contingent Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.