Sydney, November 17, 2009 -- Moody's Investors Service has published its revised methodology on the
way it rates the hybrid securities and subordinated debt instruments issued
by banks. The new methodology is in line with changes proposed
by the rating agency earlier this year and largely removes previous assumptions
of systemic support for these securities. In addition, the
ratings will differentiate among hybrid instruments based on certain features
that affect the risk to investors. The ratings of securities potentially
affected by this methodology change will be placed under review for possible
downgrade and announced via a separate press release within the next two
days.
Before the current financial crisis, Moody's had assumed that any
support provided by national governments and central banks to shore up
a troubled bank and restore investor confidence would not just benefit
the bank's senior creditors but -- at least to some extent
-- investors in its subordinated and preferred securities.
"In some cases, government bank interventions throughout the
crisis have not benefited, and have even hurt the holders of those
instruments," says Moody's Senior Vice President Barbara
Havlicek. "By analyzing the lessons learned from these cases,
our ratings will now better capture this risk."
In addition, support packages have been contingent upon the bank's
suspension of coupon payments on these instruments as a means to preserve
capital. Certain types of hybrids have been more at risk for these
government and regulatory actions than others because of their features
-- for example, those that allow for coupon payments to be
skipped and on a non-cumulative basis (i.e. they
do not need to be repaid in the future).
"While there is uncertainty as to how the various types of hybrids
will absorb losses in a given situation, it is clear that hybrids
are highly susceptible to losses due to their unique equity-like
features," Moody's Havlicek says. "Going
forward, we expect governments and regulators to focus on the equity-like
features of hybrids and, to the extent contractually and legally
possible, support coupon skips and/or principal write-downs
for hybrids issued by troubled banks."
While Moody's revised methodology provides a broad framework for
rating hybrid capital and subordinated debt, the analysis will be
complemented by country-specific and case-specific credit
considerations.
Moody's proposed changes to its rating methodology in a request
for comment published June 17, 2009, and has since received
a broad range of comments from investors, intermediaries,
issuers and regulators.
"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.
Moody's says it is also looking at the need to revise the equity
credit it attributes to hybrids in its capital calculations. As
part of this review, greater equity credit may be given for deeply
subordinated, non-cumulative instruments while less may be
given for hybrids without these features. Moody's intends
to issue a Request for Comment on this issue in the coming weeks.
Moody's revised methodology for rating bank hybrids is applicable globally,
except for Mexico. This methodology will become applicable in Mexico
on 30 November 2009, after a requirement to file new methodologies
with local regulators for a period of ten days prior to their effective
date has been satisfied.
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New York
Barbara J. Havlicek
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Singapore
Deborah Schuler
Senior Vice President
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
Moody's finalizes new methodology for bank hybrid, sub debt ratings