Moody's Set to Issue Revised Guidelines for Hybrid Securities
New York, February 06, 2007 -- Moody's Investors Service announced today that, except for
hybrid securities with meaningful mandatory deferral triggers, all
preferred stock and hybrid securities will continue to be rated according
to existing notching guidelines with no rating distinction made among
cumulative, non-cash cumulative and non-cumulative
In November 2006, Moody's proposed new notching guidelines
for preferred stock and hybrid securities -- obligations that combine
features of debt and equity -- and requested comment about its proposal
from market participants in a special report, "Rating Preferred
Stock and Hybrid Securities."
The original proposal called for lowering ratings by one notch on non-cumulative
preferred stock and other hybrid securities ranked as either "moderate"
or "strong" for "no ongoing payments" by Moody's
New Instruments Committee.
Moody's said that market reaction to the proposal was largely negative.
Recurrent themes were the incentives issuers have to avoid deferring payments
on any hybrid security and the lack of strong statistical evidence supporting
greater notching for non-cumulative securities. Having considered
the points made by respondents, Moody's decided not to adopt
the proposal, and to keep its notching conventions largely unchanged.
"While there may be further refinements, we now expect the
revised guidelines to be adopted," said Jerome Fons,
Managing Director for Credit Policy at Moody's. "We
would like to thank all market participants who responded to our request
The revised proposal calls for hybrid securities with a meaningful mandatory
deferral trigger to be rated one notch lower than indicated by existing
notching guidelines. "In addition," said Fons,
"the new guidelines call for no obligation of an investment-grade
issuer to be rated more than two notches below the issuer's senior
unsecured or issuer rating.
Unless indicated otherwise by Moody's loss given default (LGD) rating
methodology, he added, "no obligation of a speculative-grade
issuer should be rated more than four notches below the issuer's
senior rating," adding that these guidelines hold for an individual
issuer, rather than across a family of issuers.
For issuers with senior unsecured ratings or corporate family ratings,
if applicable, at Ba2 or higher, Moody's notching guidelines
will continue to suggest that senior subordinated, subordinated
and junior subordinated debt be rated one notch below senior unsecured
debt; and preferred stock be rated two notches below senior unsecured
debt. The two-notch guideline also holds for deeply subordinated
securities that are similarly positioned in the capital structure,
as found, for example, in certain European countries.
For issuers with senior ratings below Ba2, the guidelines suggest
two notches for subordinated debt, two or three notches for junior
subordinated debt, and three or four notches for preferred stock.
"For most issuers with corporate family ratings, notching
for subordination is determined by Moody's LGD methodology and may differ
from these guidelines," said Fons. "In addition,
notching practices for banks and insurance companies may vary more widely,
reflecting their unique regulatory and support status."
He said exceptions to the revised guidelines will be permitted in certain
circumstances, including those cases in which additional notching
may be applied to hybrids that allow principal write-downs or contain
other features that may significantly increase investor expected loss.
Also excluded from consideration at this time are hybrid securities issued
by members of banking groups, where any potential rating revisions
would be considered in the context of Moody's proposed incorporation
of joint-default analysis into its bank ratings.
Based on the comments received to date, as well as further analysis
of the relevant issues, including further discussion with select
market participants, Fons said, Moody's will shortly
release the final guidelines in a methodology report that outlines notching
for preferred stock and other hybrid securities.
As a result of the revised proposed notching guidelines, the following
securities have been placed on review for change.
Hybrid ratings put on review for downgrade:
Allianz AG, A2-rated Perpetual Junior Subordinated Notes,
EUR 1,500,000,000 issued in February 2004 and EUR 800,000,000
issued in February 2006
ELM B.V., A1-rated Perpetual Subordinated Step-Up
Loans of Swiss Reinsurance Company, EUR 1,000,000,000
issued in May 2006
Metropolitan Life, A3-rated Junior Subordinated Notes,
USD 1,000,000,000 issued in December 2006
Peabody Energy Corporation, Ba2-rated Junior Subordinated
Notes, USD 675,000,000 issued in December 2006
Swiss Reinsurance Company, A1-rated Perpetual Subordinated
Step-Up Preferred Securities, USD 750,000,000
issued by Swiss Re Capital I LP in May 2006
Zurich Financial Services, Baa2-rated Enhanced Capital Advantaged
Securities -- "ECAPS" -- USD 600,000,000 issued
by ZFS Finance (USA) Trust I in November 2005; USD 700,000,000
issued by ZFS Finance (USA) Trust II in December 2005; USD 400,000,000
issued by ZFS Finance (USA) Trust III in December 2005
Hybrid ratings put on review for upgrade:
Assured Guaranty US Holdings, Inc., A3-rated
Junior Subordinated Notes, USD 150,000,000 issued in
Financial Security Assurance Holdings Ltd., A1-rated
Junior Subordinated Notes, USD 300,000,000 issued in
Morgan Stanley Capital Trust VII, A2-rated Preferred Stock,
USD 1,000,000,000 issued ion October 2006
Nelnet, Inc., Ba1-rated Subordinated Notes,
USD 200,000,000 issued in September 2006
Jerome S. Fons
Moody's Investors Service
Barbara J. Havlicek
Senior Vice President
Financial Institutions Group
Moody's Investors Service