I noted in an earlier post today that both Fitch and Moody's downgraded the hybrid securities of ING, and Fitch downgraded Aegon, two firms which received financial assistance from the Dutch government during this latest financial crisis. I currently own AEB, AEH, IND, INZ, ISF and IGK, and took a hit today. Mostly, except for the recent purchase of IGK, I lost some of my gains purchasing these securities during prior meltdowns. All of these securities have cumulative features, and require the payment of interest at the coupon rate in the event of an optional deferral. This is the provision from the IGK prospectus on a voluntary deferral:
|"Subject to the payment restrictions described below, we may defer all or part of any accrued interest otherwise due on an interest payment date by giving a notice to the trustee (who shall in turn notify the holders of the Securities) not less than 16 business days prior to the interest payment date on which that accrued interest or part thereof would otherwise have been due and payable. Any interest or part thereof that we have deferred as described above shall bear interest at the rate of 8.50% per annum from and including the interest payment date on which that interest or part thereof would otherwise have been due and payable to but excluding the date on which that interest or part thereof and accrued and unpaid interest thereon have been paid in full, except that interest shall not accrue on any such deferred interest payment or part thereof for any period during which a condition exists that requires us to defer interest as described below."|
This is what is meant by a cumulative interest payment. It is a very common type of provision for junior debt securities. Another ING hybrid security will have similar language except the deferral would earn interest at the coupon rate for that security. I believe the 8.5% coupon for IGK is the highest among the publicly U.S. traded ING hybrids. An optional deferral does not save ING money. Interest is still owed and interest might have to be paid on the deferred balance. Each prospectus needs to be inspected separately on these issues.
In my opinion, the European Commission does interfere with the recovery of these financial institutions by pressuring them to defer paying their bond obligations when the firms are solvent. This would actually do more harm than good. Whenever a financial firm defers payments on its junior bonds, it will be viewed by many as a sign of distress, no matter what anybody says, which is more likely to make matters worse for the firm. Nothing positive of a non-political nature is accomplished by any such action by the European Commission. The interest is still owed as I understand the provisions contained in the prospectuses for the junior bonds which I own. A deferral does have tax implications for a U.S. holder, which is one reason that I placed some of my purchases in a retirement account.
A more detailed explanation of deferral rights and the consequences thereof can be found at pages S 17-18.
Since nothing is gained of a positive nature by pressuring the solvent financial institutions to defer paying their obligations, the only explanation left is that the European Commission is acting primarily- if not exclusively- out of political considerations. Moody's seem confident that the Commission would pressure ING to defer honoring its debt obligations, even though ING is taking steps to pay the Dutch government back. Fortunately, the U.S. government, under both Republican and Democratic Administrations, has recognized so far the stupidity of what the Europeans are apparently now trying to do, at least according to the rating agencies.
I am going to wait and see what happens. Hopefully, the Commission will reconsider, put politics aside, and act in the best interest of the European financial institutions. Or, while Moody's appears to believe it would be difficult for ING to ignore pressure from the Commission, possibly the Dutch government would stand behind them if ING gives the Commission the finger which is exactly what ING should do. Now, to be candid, I have no idea whether ING even has that option. I just hope that it does.