MetLife Bondholders Hurt by Court Victory, Moody's Says

  • Ruling removes ``additional scrutiny,'' analysts say
  • Court case may spur AIG, Prudential to seek to remove tag

MetLife Inc.’s successful challenge of its too-big-to-fail designation poses a risk to the insurer’s bondholders because it eliminates a layer of oversight, according to Moody’s Investors Service.

“It removes the additional scrutiny of rigorous stress testing and requirements related to solvency, capital adequacy, and liquidity,” Moody’s analysts Scott Robinson and Shachar Gonen said Thursday in a note describing MetLife’s court victory as credit negative. “While we believe MetLife has strong risk management, the recent action also lessens the deterrent to assuming outsized risks.”

U.S. District Judge Rosemary Collyer on Wednesday struck down the Financial Stability Oversight Council’s designation of MetLife as a systemically important financial institution, freeing the largest U.S. life insurer from possibly tighter capital standards. The ruling, which could be appealed by regulators, may spur American International Group Inc. and Prudential Financial Inc. to try to remove the SIFI label, Moody’s analysts said.

MetLife might be able to return more funds to shareholders after escaping its SIFI tag, a move that could chip away at the capital buffer that helps protect bondholders, Moody’s said.

Chief Executive Officer Steve Kandarian has argued that the SIFI label hurt his company by giving an edge to smaller rivals that don’t face the same regulatory scrutiny. The ratings firm acknowledged that view in its report.

‘Different Standard’

“MetLife will no longer be held to a different standard from others in the life industry, something that would have put them at a competitive disadvantage,” the Moody’s analysts wrote. They also said that Kandarian may gain operational flexibility and the potential for increased investor interest without the SIFI designation.

The cost to protect MetLife debt against default in the credit derivatives market for five years fell 10.5 basis points on Thursday to 133.5 basis points, according to data provider CMA. That represents $133,500 a year for every $10 million protected. The cost fell 4.5 basis points Wednesday, the day the judge’s ruling was announced. MetLife’s shares slipped 1.8 percent at 4:15 p.m. after rallying 5.3 percent Wednesday.

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