By Zach Fuchs
Every year, the agencies roll out another classification scheme for hybrids. Fitch Ratings has finally streamlined its criteria into a five-tier Class A to E debt-equity continuum with a flat 30% cap on hybrids as a proportion of eligible capital.
On Fitch’s new continuum, Class A is pure equity, while Class E is pure debt. This is the reverse of the basket system employed by Moody’s, in which Basket A represents pure debt.
Crucially, the standards are now the same for banks and corporates. In its previous standard, the agency explained the need for a more conservative approach for bank hybrids, since a beleaguered corporate can skip a payment more easily without rattling the capital markets. Fitch’s former plan depended on the regulatory system to induce banks to issue a greater proportion of higher-quality securities, while it established a strict 15% cap on hybrids for corporates rated AA– or above.
Tolerance levels
Now the 30% tolerance level applies to all sectors. “We’ve gone through the analytics for corporates, insurers, and banks, and there’s no reason why each sector should have a different approach,” says Karsten Frankfurth, head of corporates at Fitch.