Approximately $450 Billion of hybrid and subordinated debt affected
New York, November 18, 2009 -- Moody's Investors Service has placed under review for possible downgrade
the ratings of 775 hybrid and subordinated debt securities issued by 170
bank families in 36 countries following a change to its rating methodology
for these instruments. A detailed list of ratings affected is available
on the company's website at http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_121275.
The reviews follow the rating agency's announcement that it has
changed the way in which it rates these securities to take into account
the fact that some recent government interventions in troubled banks have
not helped, and have even been to the detriment of, the holders
of these types of securities. For example, in some cases,
support packages have been contingent upon a bank's suspension of
coupon payments on these instruments as a means to preserve capital.
Prior to the crisis, Moody's had incorporated into its ratings
an assumption that support provided by national governments and central
banks to shore up a troubled bank would, to some extent, benefit
the subordinated debt holders as well as senior creditors.
The new methodology also better captures the potential for losses that
can occur in restructurings outside liquidation, such as through
coupon suspension, principal write-downs, good bank/bad
bank structures, and distressed exchanges. These risks can
be exacerbated by the hybrid's features. Therefore,
the review of individual securities will take into account various structural
features of the instruments. These include whether or not coupon
payments can be skipped and under what circumstances, and whether
such missed payments are cumulative or non-cumulative.
Moody's anticipates that 40% of the potentially affected
hybrid ratings could be lowered by one to two notches, 50%
could be lowered three to four notches, and the remainder could
be lowered by five or more notches.
As the likely extent and form of government support -- or intervention—
is an important part of the analysis, the reviews will incorporate
policy differences between countries and the relationships of individual
banks with the government. While it is clear that governments and
regulators, to the extent contractually and legally possible,
may support coupon skips and/or principal write-downs for hybrids
issued by troubled banks, the timing of such actions is uncertain,
depending on country-specific considerations.
As a result, ratings on one class of securities, junior subordinated
debt, are likely to continue to benefit from the uplift of government
support -- at least in the near term. This is especially the
case for banks in countries such as Japan, where a previous banking
crisis has led to a well-defined resolution process and where junior
subordinated debt has been supported during a time of financial distress.
It is also the case in certain emerging markets, where banks are
an important part of the economic development of the country and therefore
likely to benefit from high levels of government support.
For banks in the countries or regions particularly hard hit by the crisis,
which have enjoyed extraordinary levels of support, we expect junior
subordinated debt ratings to be anchored closer to the intrinsic financial
strength of the bank as government support gradually diminishes.
The rating agency expects to complete the reviews of individual ratings
over the next three months and will announce the outcome of each review
as it is completed. Banks with ratings already under review may
be excluded from this review, and the changes to their hybrid ratings
will be made at the same time the reviews on their other ratings are resolved.
"Moody's Guidelines for Rating Bank Hybrid Securities and
Subordinated Debt" is available on moodys.com. In
conjunction with the new methodology, the rating agency has also
published a Frequently Asked Questions to address some of the issues that
were raised during the comment period.
Moody's will be holding teleconferences about the methodology on
Thursday 19 November at 12pm Hong Kong/ 1pm Tokyo/ 3pm Sydney time for
the Asian markets and at 10am EST/ 3pm GMT for the Americas and Europe.
For more information or to register, go to www.moodys.com/events.
New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Barbara J. Havlicek
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Reviews Bank Hybrids, Subordinated Debt for Downgrade