The fixed income brokers at FIIG Securities have warned of the potential for further drops in the value of bank hybrids over the next few weeks. According to FIIG, prices on the several of the largest hybrids on the ASX have fallen by A$4 to $5 for a $100 face value price and are now below issue price in many cases.FIIG has further asserted that more falls are likely to be driven by ratings agencies following Standard & Poor's announcement that it will downgrade the securities within weeks. The bond specialist's thesis is that a downgrade may force many fund managers and financial planners to dump the hybrids if their ratings dip below investment grade. If that were to happen, a severe ratings downgrade would certainly see a high volume of forced sellers and put downward pricing pressure on these hybrids. This could shake the market, along with making the Big Four's funding task a little harder. To date, Australian investors have been happy to help, and invested a total of $20 billion in the equity hybrids, including the recent $2.6 billion CBA hybrid PERLS VII.  "This reinforces our view that they are very volatile and investors are not being fairly compensated for the associated risks," FIIG's head of markets, Craig Swanger said."We believe recent price moves have moved prices closer to the sorts of levels that hybrids trade at in Europe." "The recent CBA Perls issue was done at 2.8 per cent over BBSW (being about 5.4 per cent pa).  Bank hybrids in Europe are trading at around double this level, but even if at the lowest end of the European range, the CBA deal should have been around 400 bps over (or 6.6 per cent pa).  If the Australian hybrids corrected to that sort of yield, their price would fall to $95 to $96 [on paper with a $100 notional face value]."Swanger said the re-rating would affect the new generation of "equity hybrids" or "CoCos" (Contingent Convertibles) which were structured to allow banking regulators to convert them into equity in times of crisis, not the older hybrids like ANZPA which are structured more like bonds. These new generation of hybrids include NABPA, NABPB, WBCPD, WBCPE, CBAPC (Perls VI) and CBAPD (Perls VII)."The problem is that these new securities are engineered for a specific purpose, namely to be used to "bail-in" capital in the event that the banking regulator becomes concerned," Swanger said. "This is a post-GFC device that as yet is untested so markets don't know how to price this risk and regulators are still shifting their rhetoric around how they will use their right to force conversion."  But FIIG's analysis overlooks a few factors. On their own numbers above, up to A$3 billion has been placed into the market over the last month, and retail investors have not been prevented from buying them with their ears pinned back. Further, S&P ratings cannot be disclosed to retail investors and the institutional take-up of hybrids